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Starting with reforms to stamp duty on home purchases, over the last 25+ years the UK has been changing its tax law to accommodate Islamic finance.

The changes have been slow and incremental for several reasons:

• Parliament has limited capacity for passing new laws, and there are many competing priorities for Parliamentary time. Meanwhile Islamic finance is a niche part of the economy.
• The tax law changes needed are complex.
• The Government is very concerned that changes might have unintended consequences, or might create scope for tax avoidance.

However the process continues, and has picked up after the July 2024 general election. See "My forecast last year [2024] of what the UK’s general election would mean for Islamic finance."

I am on a couple of working parties lobbying the Government for proposed changes. One of the requests is a change to the tax rules governing "Investment bonds." (That is the name UK tax law gives to sukuk.) I explained the issue in simple terms in my July 2025 article for the magazine "Islamic Finance News."

You can read it below.

Widening Islamic finance needs many small steps

Soberingly, 2025 marks 20 years since UK’s Finance Act 2005 which created tax rules for murabaha and mudharabah transactions, although those Arabic terms are not used in the law. These changes were essential to enable Islamic banks to operate in the UK. 2005 is personally relevant, since I got involved with Islamic finance because someone asked me to write a commentary on the FA 2005 provisions!

Since then, the tax rules have been broadened many times, but always by very small increments. Governments have been paranoid (in my view correctly) that any rule changes might have unintended consequences or be used to facilitate tax avoidance.

I have recently focused on the need for another small UK tax law change, regarding securitisation transactions which are used to issue sukuk. I explained securitisations in my article “Islamic and conventional securitizations have essentially the same economics” in the 4 April 2018 IFN issue using the example of the Al Rayan Bank sukuk.

Very briefly, home purchase finance (whether conventional or Islamic) typically comes from two types of suppliers:

1. Businesses that have large amounts of funds available. For example, banks that have funds from taking customer deposits.
2. Businesses that don’t have large funds of their own, but which sell on the home purchase plan arrangements. For example, in the UK, businesses that are regulated as home purchase plan (“HPP”) providers, but which are not banks. (As a minor complication, banks sometimes sell on their home finance arrangements, as did Al Rayan Bank with its sukuk transaction.)

As explained in my 2018 article, in both conventional and Shariah compliant transactions, the HPP provider will typically sell on its financing arrangements to another company, usually referred to as a special purpose vehicle (“SPV”).

That sale separates the ownership of the financing arrangements from the HPP or its potential creditors, ensuring that the SPV cannot lose ownership of the financing arrangements if the HPP provider becomes insolvent.

The SPV in turn raises the funds it requires by selling investment instruments to investors. In conventional finance, those investment instruments will be interest paying bonds. In Islamic finance, those investment instruments will be sukuk. The UK created a tax regime for sukuk (called “investment bonds” in UK tax law) as long ago as 2009.

There is a key difference between conventional securitisations and sukuk.

In a conventional securitisation, the bonds can be issued by selling them on a stock exchange, or they can simply be sold directly to investors without being listed on a stock exchange. This is known as a private placement.

In the case of sukuk, the essential UK tax rules don’t apply unless the sukuk are listed on a stock exchange (as defined in the tax legislation.)

This listing requirement means Islamic finance transactions are treated worse than conventional private placement transactions for many reasons. Listing obviously requires paying listing fees to the stock exchange. It also means higher professional costs to draft more complex documents, to monitor more complex regulatory requirements, to make extra public disclosures, etc. Raising money on a stock exchange is also considerably less flexible than issuing sukuk directly to private investors would be.

The listing requirement was originally imposed to prevent “mischief,” but I think its time has passed. There are many other ways of protecting against mischief that would impose far lower costs on Islamic finance transactions. UK law needs to change.

Mohammed Amin is an Islamic finance consultant and former tax partner at PwC in the UK.