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The Chancellor is expected next week to close a loophole in Sharia finance rules that have allowed commercial property investors to avoid paying stamp duty on more than £1 billion of deals, The Times has learnt.
Alistair Darling is expected to tighten the rules on mortgages that comply with Sharia – or Islamic law – in his inaugural Budget after commercial property developers discovered a quirk in the legislation that allowed them to escape stamp duty. The Government brought in changes to the stamp duty regime three years ago amid concern that homeowners opting for Sharia-compliant mortgages were paying stamp duty twice.
The 2005 Budget brought in measures to correct this anomaly but inadvertently created a tax avoidance opportunity that property developers have rushed to exploit. More than £1 billion of commercial property deals over the past two years have escaped stamp duty at 4 per cent.
Peter Beckett, the tax director for Ernst & Young, said: “This loophole has existed since 2005 but has been used more widely following the closure of previous stamp duty tax planning schemes.”
Senior City tax lawyers, commercial property agents and a head of asset finance for one of Britain’s largest banks said that increasing numbers of office sales worth £50 million to £100 million or more have been structured using the latest Sharia-compliant financing to take advantage of the loophole. Those buying and selling the properties come from all religious backgrounds and many have no cultural imperatives to use Sharia.
Sharia prevents Muslims from charging or paying interest. Under Sharia-compliant property finance deals, the bank buys the property from the seller, rather than simply providing finance for the buyer to own the property directly.
The buyer then rents the property back from the bank for, typically, 25 years – equivalent to the term in a conventional mortgage – eventually buying the property from the bank for a prearranged price higher than the original sale.
Before changes to stamp duty regulations, Sharia-compliant property deals would have attracted stamp duty twice for home sales and three times for commercial building sales because stamp duty is payable on commercial leases. The changes should have meant that stamp duty was payable only once, in line with conventional mortgages. Commercial property investors have discovered a loophole under which the bank includes an option for the original seller to buy back the property. This technical detail means that, for tax purposes, there has been no transfer of land and, therefore, no stamp duty falls due.
The emergence of the loophole comes only weeks after the Ministry of Defence completed the sale of Chelsea Barracks to Project Blue Guernsey, a company owned by Qatar and an offshore vehicle controlled by Christian Candy, a British luxury-flats developer, in a £959 million deal. Chelsea Barracks is being managed by Candy & Candy, a firm of designers owned by Mr Candy and his brother Nick.
Nick Candy declined to comment on the stamp duty aspects of Chelsea Barracks. He said: “We are under strict confidentiality with the banks and our partners on the deal. Project Blue Guernsey can’t comment.”
One senior City property agent, who said that he had been involved in four London office sales over the past six months, each worth more than £100 million and using Sharia-compliant deals, said: “There has definitely been over a billion pounds’ worth of deals – it is only worth doing on the larger deals. There is nothing illegal but it has only become fashionable over the past six months.”
The Treasury said: “The tax system is constantly kept under review to ensure legislation is operating as Parliament intended. Where evidence is found that it isn’t, the Government will move quickly to close loopholes.
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With the amount these guys pay their lawyers, it's about time they came up with a good idea!
Jayne Wilson, London, England
It is rush to accommodate Muslim rules in a Christian state the government has lost enough tax revenue to build a new hospital. A sad state of affairs indeed.
A Harris, Kettering, Tyne and Wear
Wrong. One thing you have ignored is that this law was made mainly to attract funds from the middle east, that was even then when the economy is in a better shape, its even worse now. Before you say the government has lost tax revenue in making this law find out how much it has gained first.
Muhammad, Cambridge,
Will the tightening apply to Muslim property developers too?
Mike Bibby, St Albans, England -not EU
Rick, Dubai - so how come the law has been twisted to meet a particular religious group? Employment law and educational provision are equially twisted to meet the demands of religious groups - not just Muslims. As a law abiding, hard working, ethical non believer, I object to these different interpretations - the law is the law and should only be changed through the ballot box.
sk, East Sussex,
Surely we just need a lot FEWER taxes?
Labour has tried to create a climate in which taxes cannot be cut; where every saving means "less money for the NHS" or some such, while every bit of profligacy means taxes 'must' be raised.
We're all paying 46% income tax now, even on basic rate (22% PAYE, 11% EE NI and the hidden 13% ERS NI). Do we all feel that we get quantifiable value for half our salary's worth of tax?
Roger, Ipswich,
Stop pandering it is costing the taxpayer. We already have a system of finance in the UK we do not need another.
David Thijm, Stourbridge, UK
Nothing really to say anymore - Just waiting for election day when I can vote CONSERVATIVE!
Mark , Maidstone, UK
As far as I can see, this has nothing to do with Islam nor with Muslims. Rather, it has to do with a quirk in the law. It just so happens this quirk was created because of one group's religious affiliations, but the fact that the intended beneficiaries are Muslims is as unimportant as the colour of shirt they wear or the way they cut their hair.
Indeed, there are many people exploiting this loophole who aren't Muslims at all.
Let's not make this into a religious/cultural issue when it so clearly isn't.
John F, London,
sk, there have been no "adjustments in law" in this matter. All that has happened is that banks have created a work-around to ensure practicing Muslims have the opportunity to purchase property while satisfying themselves that they have not compromised any of the tenets of their religion.
The exchequer dropped the ball and now they are clearing up the mess, not a moment too soon. This is barely news.
Oh and A Harris, but of course, even if the government had claimed the estimated billion pounds in tax, there's no way they would "waste" it on a new hospital. Not when there are wars to fight.
Rick, dubai, uae
Richard (George Town, Cayman Islands) is wrong about pensions. They are a way to defer paying tax on income until after one has retired. That is why it was so wrong for GB in 1998 to stop pension funds reclaiming tax deducted on their dividend income.
Peter, Maidstone UK,
Tax avoidance is not a crime. Tax evasion is. A small technicality but one that should not be overlooked.
Bob, London,
To Joe - Tax avoidance is LEGAL. Tax evasion is not. After all, don't you pay into a pension scheme and claim a deduction on your gross salary?
Richard, George Town, Cayman Islands
This government is quite capable of losing vast amounts of money without trying to blame things on Muslims or for that matter any single group that the government has focussed on during its 10 years of making a complete pigs ear of things.
Roger, London, UK
Clearly yet another Brown bloomer - time for him and Labour to go
peter, Singapore,
I professed to be CoE but now admit to have been a Muslim all along. Does this mean he stamp duty I have paid on my home purchase can be recouped? Great - what an unexpected windfall. Where can I find the application form? Pretty please???????
LT, Warminster, UK
There should be no adjustments in law for any religions. It is up to the individuals living in this country to compy equally. This goes for
all aspects - finances, areas for prayers, benefits, housing, planning laws and education etc.
sk, East Sussex,
If the company that is purchasing the buildings is not MUSLIM owned then using Sharia is illegal and will be tax avoidance. This carries a huge fine and the stamp duty should be reclaimed.
This is a sad case of where the MP's have no idea of the reality of situations.
Joe, Edinburgh, Scotland
It is rush to accommodate Muslim rules in a Christian state the government has lost enough tax revenue to build a new hospital. A sad state of affairs indeed.
A Harris, Kettering, Tyne and Wear