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Lecture: Islamic finance - why, how, and the problems under UK tax law

My recorded 55 minute PowerPoint presentation explains how the UK has modified its tax law to facilitate Islamic finance.

Lecture delivered 4 May 2017. Posted 10 July 2017. Handout added 5 August 2017. Q&A session added 3 January 2019.

The regional branches of the Chartered Institute of Taxation all have programmes of tax lectures. On 4 May 2017 I gave the Harrow and North London Branch of the CIOT a lecture on the tax implications of Islamic finance.

As many in the audience were not Islamic finance specialists, I also included some basics regarding how Islamic finance works. I recorded the lecture, and it can now be watched below as a self-advancing PowerPoint presentation.

I am also making available here my 49-page handout "How the UK deals with the taxation of Islamic finance."


Presentation outline


How the presentation was recorded

My first presentation recording was done on the spur of the moment, just putting my iPhone 6 on the table and relying on its built in microphone. See my page Lecture: The Quran recognises religious freedom.

Once I found recording presentations worthwhile, I purchased a high quality Sennheiser digital lapel microphone which plugs into the data socket of my iPhone 6. That produces a much better recording.

Presentation slides

I have made the PowerPoint presentation slides available for download.

A partial transcript of the question and answer session

The question and answer session was also recorded. However, I am not publishing the full audio recording for two main reasons:

  1. While the sound quality of my responses is very clear, the questioners were some distance from the microphone. Accordingly, in many cases their questions are almost inaudible.
  2. I respect the privacy of those asking the questions. I do not have their written consent to publish their recordings. In many cases, I do not even know who they were, so cannot seek permission.

Instead, I have listened to the Q&A session and, where I regard the questions as being worth sharing, have written down a condensed version of the questions. I have then published the audio of my answers.

1. Do you think the UK Government could be persuaded to provide capital gains tax relief for individuals seeking to use Islamic finance to refinance appreciated real estate?

That is the problem "No relief from tax on any capital gain" on slide 51 below.

Recording of my 90-second answer

The above problem and the subsequent attempts to get UK tax law changed are covered on my website page "UK taxation needs to accommodate Shariah compliant real estate refinancing."

2. If Islamic finance is taken out for a transaction which gives rise to rental income, is the tax relief for the Islamic finance given up-front or is it spread?

Recording of my 1-minute answer

3. In a diminishing shared ownership transaction, where the bank initially owns say 75% of the property and then gradually sells it to the ultimate owner, if the property is rented out how is the rent allocated?

To make this question clearer, it helps to look at the mortgage structure discussed on slide 18 below.

Recording of my 90-second answer

4. So is the buyer in this Islamic mortgage is really paying interest rather than paying rent?

Recording of my 3-minute answer

The three different relgious views found amongst Muslims are discussed on my website page "Are Islamic banks Islamic enough?"

5. Is it correct to assume that when preparing tax computations, Islamic finance transactions are treated like “loan relationships?”

Loan relationship is a special term in tax law originally introduced in Finance Act 1996. For more background on this, and the reasons why the 1996 legislation was introduced, see my "My fellowship thesis for the Chartered Institute of Taxation" written in 1999.

Recording of my 30-second answer

6. When preparing a set of financial accounts, would you call the cost of Islamic finance “interest”?

Recording of my 90-second answer

My answer mentions that there are articles on my website where I have discussed the difference between accounting under International Financial Reporting Standards (IFRS) and under the accounting standards promulgated by the Accounting and Auditing Organisation for Islamic Financial Institututions (AAOIFI). They are below:

"What is AAOIFI’s Proper Accounting Standards Role?"

"Accounting for sale and leaseback under AAOIFI and IFRS, and the tax implications"

"Islamic Financial Institutions and the Implications of Accounting under IFRS"

"Is there a meaningful choice between AAOIFI and IFRS accounting standards?"


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