Having a sharia-compliant mortgage doesn’t mean stamp duty isn’t paid

A tweet that has been shared over 1,000 times says: “In the U.K. you are exempt from paying Stamp Duty (tax) when you purchase properties if you follow Sharia Law. While we are all for cutting taxes, why are some people exempt and others aren’t? The law in Britain must be universal, we can’t live in a two-tier system.”

The tweet includes a screenshot of a webpage on GOV.UK about stamp duty, which, under the subheading “Exceptions” says “You do not have to pay SDLT [stamp duty land tax] or file a return if [...] you use alternative property financial arrangements, for example to comply with Sharia law”.

Former Conservative and now Reclaim MP Andrew Bridgen also shared the tweet, adding: “We all must be equal under the law and the tax code.”

The original tweet was sent by Turning Point UK, which describes itself as a “right-wing conservative activist and political organisation”. Similar claims, including one post saying “One way to avoid Stamp Duty..... Convert to Islam and comply with Sharia Law” are also being shared on Facebook.

However, it’s not the case that Muslims, or those who choose a sharia (Islamic principles) compliant mortgage do not have to pay stamp duty at all. Stamp duty is always paid on liable properties purchased with these mortgages.

The rules were changed in 2003 because previously some sharia-compliant mortgages meant people had to pay stamp duty twice, because the process involved a bank or lender initially buying the property and the buyer then purchasing it from the bank, effectively involving two sales.

HMRC’s guidance on “transactions that do not need a [stamp duty] return” clarifies this, saying: “Sometimes the financial arrangements for buying a property or land involve a secondary transaction with the lender. This follows on from the main transaction (for example when you follow Sharia law). These later transactions may be exempt from SDLT where you meet specific conditions.”

HMRC confirmed to Full Fact that the rules ensure that such sharia-compliant mortgage arrangements provide the same outcome and amount of stamp duty payable as where the purchaser uses a conventional mortgage to finance their purchase.

So properties sold with sharia-compliant mortgages are not exempt from paying stamp duty altogether.

What is stamp duty?

Stamp duty land tax, also known as stamp duty, is a tax you must pay if you buy a property or land over a certain price in England or Northern Ireland. (In Wales, Land Transaction Tax applied from April 2018 onwards, and in Scotland you pay Land and Buildings Transaction Tax).

The stamp duty threshold is the price at which you start paying stamp duty. Before these thresholds there is no tax to pay. The threshold depends on the type of property or land, for example it’s currently £250,000 for residential properties and for first time buyers purchasing a property worth up to £625,000 it’s £425,000. 

The threshold is £150,000 for non-residential land and properties.

How do sharia-compliant mortgages work?

In general, sharia-compliant mortgages help people buy homes in a way that doesn’t involve paying interest. They are sometimes called Home Purchase Plans.

There are several types that all work slightly differently but usually involve a bank purchasing the property on the buyer’s behalf or jointly with them. The buyer then pays the bank every month until they have either paid the final lease payment or they have paid the bank for its share until they own it completely.

In some Home Purchase Plans, the customer pays the stamp duty when the property is initially purchased but this is not the case for all such products. For example, with other products the lender may pay stamp duty, and pass on the cost to the buyer over time.  

This page on the government’s website explains in more detail when and how stamp duty is paid, depending on the type of sharia-compliant mortgage.

Previously, because the home was essentially being sold twice, once from the seller to the bank and again from the bank to the buyer, people with these types of buying arrangements could end up paying stamp duty twice.

But in 2003 an exemption was introduced to stop stamp duty payment being incurred twice on these financial products.

According to John Dewar and Munib Hussain from Millbank LLP, writing for the Law Reviews in 2022: “Under ijarah and diminishing musharakah structures [two types of sharia-compliant home purchase plans], there are effectively two sales of the property being financed: the first when the bank buys the property from the vendor, and the second when the homeowner completes repayment of the financing and buys the property back from the bank. 

“Each of these purchase transactions previously gave rise to a charge to stamp duty land tax, which made the Islamic mortgage market prohibitively expensive. The Finance Act 2003 introduced specific exemptions for Islamic mortgages to ensure that they incurred only one charge to stamp duty in the same manner as a conventional mortgage.

Ibrahim Khan, the co-founder of Islamic Finance Guru, a website that helps Muslims “get ahead on their investment, personal finance and entrepreneurial journeys”, told Full Fact Muslims are not exempt from paying stamp duty.

He said: “The way an Islamic mortgage works is, rather than the homeowner buying the property outright and having a loan, initially the bank buys a stake in the property and slowly gets bought out. This means that there is technically a transfer at the land registry at the start from the seller to the bank, and then at the end of the mortgage from the bank to the homeowner who has now completely paid off the bank. 

“Stamp duty is exempt for this final formal transfer to make sure Muslims who use Islamic mortgages are not disadvantaged.”

Turning Point UK’s response

A Turning Point UK spokesperson told Full Fact: "Technically, non-Sharia Law following UK citizens cannot borrow money from the bank specifically for SDLT (Stamp Duty Land Tax), so it must be paid directly by the house buyer themselves.”

While this is technically true, depending on the loan to value ratio of their mortgage, some people may be able to use some of their deposit to cover the stamp duty and increase the amount they borrow to make up for it. Natwest says: “It's possible to borrow more against your home or property to pay your stamp duty. Your conveyancer would then use this money to make the stamp duty payment for you.”  

Turning Point UK continued: “If you cannot afford a house, and your parents or a friend bought it for you, you paid them rent to live in it, and then bought it off of them, they would first pay SDLT, and then you would need to pay the SDLT again when you bought it off of them. 

“Sharia law replaces your family or friend with a bank, and the British government recognises this as acceptable. 

We put this response to Fraz Butt, senior partner at Saracens Solicitors.

He told us: “With a traditional bank financing model a borrower takes title to their home whilst granting security to the bank, for the monies lent. In this case there is clearly an intention to acquire the property to live in it, whilst the bank provides the financing. The borrower pays [stamp duty] at the time of acquisition. When the financing is repaid legal title remains in the name of the borrower and the bank’s security is removed. In other words the borrower pays [stamp duty] once.

“With shari’ah financing, the intentions are the same i.e. the funding is required to buy the property (for the borrower) and like conventional finance the borrower pays [stamp duty] at the time of acquisition. However in this case the bank takes legal title to the property and allows the borrower to live in it and pay back the loan over time always knowing that the pseudo owner is the borrower and that they will take legal ownership once the financing is repaid. Once that financing is repaid in full, the title is transferred from the bank to the borrower, for zero consideration.”

Zero consideration means no money changes hands.

Mr Butt went on to say that the example given by Turning Point UK was not the same.

“The issue here is that the property is being ‘bought […/ sold] back’ by them. If however that second transfer (i.e. the point the property is ‘bought […/ sold] back’) from the family friend is also undertaken for zero consideration then similarly there would be no SDLT to pay. This is what happens with shari’ah financing.”

Turning Point UK also said: “That is why it is factually correct to simply quote the British government in saying that ‘You do not have to pay SDLT or file a return if: …you use alternative property financial arrangements, for example to comply with Sharia law’.”

As we have quoted above, HMRC says specific conditions have to be met in order for later transactions not to be charged stamp duty again. 

Turning Point UK added: “There is no equivalent option for ordinary citizens to avoid paying SDLT, and so it is not misleading or false to quote the law as it stands.”

Sharia-compliant home purchasing products are available to anyone, although they are usually more expensive than conventional mortgages, non-Muslims may pick them for ethical reasons or because the terms may suit them in other ways.

We’ve contacted Mr Bridgen and will update this article if he responds.

We’ve previously checked a similar false claim that Muslims are exempt from paying council tax if their home is used as a place of worship.

Image courtesy of Tierra Mallorca