legal guide09.indd - Islamic Finance News

Opportunities in Islamic Real Estate (continued..)
Under Shariah, however, interest is forbidden. On
the face of it, this puts a Shariah compliant property
fund at a disadvantage from a property fund which
is leveraged with debt. Although the fund could use
Shariah compliant financing such as a Tawarruq,
the payments made under some of these forms of
financing may be of a capital nature and therefore
there is some uncertainty as to whether these
payments would be deductible from the fund’s
property income.
The UK Government, however, has introduced the
“alternative finance regime” in the UK’s tax legislation
with the aim of ensuring that Shariah compliant
financial products are taxed in a way that is neither
more nor less advantageous than equivalent banking
products.
“The alternative fi nance
regime currently caters for
Murabahah, Mudarabah,
Wakalah and Musharakah”
The broad effect of the alternative finance regime
is to treat arrangements which meet a prescribed
fact pattern as a loan for direct tax purposes, that
is income tax and corporation tax. Payments made
under such forms of financing (referred to as the
“alternative finance return” or “profit share return”
in the legislation) can be treated as an expense of the
fund’s property business. This, therefore, removes
any uncertainty as to whether or not the fund can
deduct its “financing costs” from its property income
and puts it on a level footing with a “conventional”
property fund.
The alternative finance regime currently caters for
Murabahah, Mudarabah, Wakalah and Musharakah.
If these forms of Shariah complaint financing are
used, care needs to be taken to ensure that they are
structured so that there are no additional tax costs
such as stamp duty land tax, stamp duty or VAT, as
the alterative finance regime only applies to direct
taxes. However, relief from stamp duty land tax is
generally available.
Investment strategy and Shariah principles
The Shariah supervisory board will examine the
structure and documentation of the fund and will, if
satisfied, issue a fatwa approving the structure and
the fund documentation. The Shariah supervisory
board will also approve the investment guidelines to
be used by an investment manager and any changes
that the investment manager wants to make in the
future.
It is important to understand that any real estate
investment must be used in a Shariah compliant
manner. This means there can be problems in buying
a property where the occupants are undertaking
business activities that would not be in accordance
with Shariah. Problems can arise, for example, when
the property is let to a non-Islamic bank or if alcohol
is sold on the premises.
However, there are various screening rules that can
be used to analyze what proportion of income from
a property is non-Shariah compliant, but which is
still acceptable, so that the underlying property
investment will not be regarded as “tainted”. Clearly,
it can be seen there are many considerations to take
into account if investing in real estate, generally, and
more specifically, in an Islamic finance context.
Nichola West and Alex Thomas are London-based
partners at DentonWildeSapte.
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