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The 30 October 2024 Budget documents confirmed that the Government would legislate to fix the problem, but only prospectively.
Posted 20 December 2025
As my November 2024 column for the magazine "Islamic Finance News" reminded readers, I have written on many occasions about the tax liability that can arise when appreciated real estate is refinanced using Shariah compliant finance, if the real estate is not otherwise exempt from capital gains tax.
In the documents published alongside the 30 October 2024 Budget, the UK Government confirmed that it would legislate to eliminate this problem. The legislation is now on the statute book as Finance Act 2025 section 35 and schedule 7.
You can read my November 2024 IFN column below.
My 7 February 2024 column “The UK government finally reconsiders Shariah compliant real estate refinancing” discussed the consultation document issued by the UK Government in January 2024 regarding the possibility of eliminating the taxable capital gain that arises on using diminishing musharaka (“diminishing shared ownership, DSO” in UK tax language) to refinance appreciated real estate.
The consultation also covered the problem of tax depreciation recapture if the real estate includes assets eligible for tax depreciation (“capital allowances” in UK tax language.)
On 30 October 2024, the new Chancellor of the Exchequer, the Rt Hon Rachel Reeves MP, delivered her first Autumn Budget. While Islamic finance was not mentioned in her speech as it is a niche interest in the UK, on the same day HM Treasury published the document “Tax Simplification for Alternative Finance: Summary of Responses.”
The October document stated that the January consultation document had received 22 responses. 16 respondents are listed; the remaining six were individual respondents, including of course me!
Looking at the 16 named respondents, they cover pretty well the entire UK Islamic finance industry, since apart from the 14 organisations listed, most of the industry inputs into the All-Party Parliamentary Group on Islamic and Ethical Finance and into the Islamic Finance Hybrid Group who were the other two named respondents.
After discussing the responses, HM Treasury concludes by committing the Government to including legislation in the next Finance Bill to eliminate the capital gains tax charge on refinancing of the type under discussion.
However, the Government will not be legislating to eliminate any tax depreciation recapture.
The October document states that ¼ of respondents “did not think capital allowances implications arise in practice – respondents had not seen a case in practice or did not think there was a risk of capital allowances implications arising as DSO arrangements are typically used for residential properties where capital allowances cannot generally be claimed.” ¾ of respondents did think capital allowances implications could arise, but 2/3 of these had not seen a case in practice.
While I am disappointed about capital allowances not being tackled, I recognise that Finance Bill space is limited, and all tax law changes risk unintended consequences. The important thing in my view is to have the capital gains tax problem resolved.
More disappointing is that the legislation will only apply to transactions taking place from 30 October 2024 onwards. No retrospective relief will be included for past transactions, although I expect those affected to continue to lobby for retrospective concessional relief, which I believe would be appropriate.
My 3 July 2024 column “What will the UK’s general election mean for Islamic finance?” included a forecast of the winner of the general election taking place the following day. Nobody will regard me as a political genius for getting it right, since every credible political commentator was forecasting a Labour Party victory!
As the above consultation was launched in January, I consider that the Conservative Party would also have legislated for Shariah compliant refinancing in the same way as the new government is doing. However I remain of the view that the new UK Government will take more interest in Islamic finance than the last one did, for the reasons I gave on 3 July 2024.
Mohammed Amin is an Islamic finance consultant and former tax partner at PwC in the UK.
