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Legislation is to be introduced that will close a loophole in respect of stamp duty land tax on Sharia-compliant mortgages.
The change, introduced in the 2008 Budget, will have effect for any transaction the effective date of which is on or after 12 March 2008.
The SDLT regime had been amended because homeowners opting for Sharia-compliant mortgages were paying stamp duty twice.
In so doing, a tax-avoidance opportunity was also created that meant some commercial property investors could avoid paying SDLT.
Under the legislation - FA 2003, s 71A(2) - an exemption from SDLT is allowed where there is a purchase by the lender from the borrower.
This equates to schemes in which someone takes a mortgage out on what was a previously mortgage-free property.
The legislation also exempts a purchase by the lender from the borrower where there is a remortgage.
Some financial institutions have worked with vendors so that ownership of a property is placed in a subsidiary company of the financial institution.
The subsidiary then claims that the transaction is intended for the purposes of allowing the equivalent of mortgaging on a mortgage free property or re-mortgaging.
Once ownership of the property has passed from the vendor to the subsidiary, however, the financial institution can then sell the property without incurring any SDLT, by selling shares in the subsidiary company.
New provisions will ensure that relief will not be available if arrangements are in place for a person to acquire control of the financial institution.
Alex Thomas, a partner in Islamic finance experts Denton Wilde Sapte said: 'The changes announced in the Budget are broadly welcomed.
'However, there are still issues to be addressed in relation to VAT on Islamic finance structures.
'The changes, to counter anti-avoidance, to the Islamic finance stamp duty land tax relief are such that the relief remains for bona fide Islamic finance structures.
'However, the relief could still be wider for Sharia-compliant structures.
'The Treasury is trying to launch its own Sukuk and has discovered that the SDLT relief as it [stood] would not be wide enough to avoid an unintended SDLT charge for the Government.
'Secondary legislation is bound to follow to ensure the UK sovereign Sukuk avoids stamp duty land tax.'
