The Chartered Institute of Taxation (CIOT) have submitted a proposal to the government intended to level the playing field from a tax perspective between Islamic finance and conventional finance.

Although the government has over the years both supported and legislated for parity between conventional finance and Islamic finance transactions, such that neither is taxed more heavily (or more lightly) than the other, there are still some disparities between the two, particularly in respect of the refinancing of properties.

With conventional finance

  • A refinancing of a property does not in and of itself result in any tax liabilities. There is no disposal for capital gains tax (CGT) and no SDLT charge.
  • If they wish to reduce the amount borrowed they simply make a repayment and again there are no tax consequences.

Under Islamic finance

For refinancing to be compliant with Shariah law it must take place in a specific way:

  • The property owner sells the % of the property which they wish to refinance to the bank and then pays “rent” in respect of it.
  • If they wish to reduce the amount of finance provided by the bank, they do so by re-purchasing slices of the property from the bank.
  • Due to reliefs in s71 FA2003 there is no SDLT on the refinancing transactions.
  • There is however a part disposal for CGT purposes and tax will be due if the property has increased in value since its original purchase.
  • This is most likely to affect investors as capital gains on taxpayers’ own residences are likely to be eligible for Private Residence Relief

CIOT proposed amendments to the legislation

The CIOT have considered the rules for a similar type of transaction where relief from CGT is available (borrowing using listed debt instruments) and have proposed that those rules are adapted to allow relief to be available for Islamic finance transactions where:

  • The property owner transfers land to a qualifying financial institution for the purposes of a diminishing shared ownership (DSO) transaction between the financial institution and the owner.
  • The land is situated in the UK.
  • The owner and financial institution deliver to HMRC, within a specified period, a first legal charge over the land equal to the CGT that the owner would have paid if the owner had sold the property in a taxable disposal for a consideration equal to the price paid by the financial institution to the owner.
  • The owner claims relief via the self-assessment return.
  • Within a certain period, to be determined by HMRC, and under the DSO contract, the entire ownership of the land is re-acquired by the owner from the financial institution. HMRC would need to consider what is normal market practice in determining what the period should be, but 20 or 25 years may be appropriate.

This would ensure that no disposal would take place and for CGT and capital allowances purposes the owner would be treated as owning the building throughout.


Aligning the tax treatment of Islamic finance and conventional finance Submission by the Chartered Institute of Taxation



Wouldn’t it be great and think how much TIME it would SAVE you if someone:

  • READ all the latest tax news, case decisions, new legislation and articles in tax and then summarised them for you?
  • Only alerted you to things that are RELEVANT to you?

How about if that someone also:

  • Updated those summaries in REAL TIME for you
  • ADDED examples, planning points, toolkits and calculators, and
  • Linked all that information together and also provided you with CPD?

Thousands of firms of accountants and advisers are already using as their primary TAX resource.

At a cost of just £1 per day, it’s a no brainer: FREE up your MIND and your TIME (and your wallet).

And...we run our Virtual Tax Partner support service, if you need assistance with a particular query or technical issue.