Shariah Tax Planning in the UK by Riyazi Farook

Shariah Tax Planning in the UK By Riyazi Farook 26th January 2007 (Vol. 4, Issue 4) In the UK, a 40% inheritance tax (IHT) is i mposed on certain assets in excess of £285,000 (US$564,860) of a deceased person’s estate for the tax year 2006/2007. This individual allowance, which is revised annually, is known as the nil rate band (NRB). There are ways to substantially reduce or even eliminate any IHT liability, if arranged prior to death. Reliefs Whilst there are many exemptions and reliefs available, the following provides a summary of the most relevant principles. Gifts Gifts of any value made by the deceased to the surviving spouse, before or on death, are exempt from IHT. However, these gifts may be liable to IHT on the death of the surviving spouse. English law does not recognize the Islamic Nikkah (solemnization) ceremony if undertaken in the UK, with the exception that the ceremony is used to obtain a civil marriage certificate. If the surviving spouse is not UK domiciled, the inter-spouse exemption is limited to £55,000 (US$109,023). A popular use of this exemption is to ensure that on death all assets in excess of the NRB are passed to the surviving spouse. Gifts of any value made to a registered UK charity are exempt from inheritance tax (IHT). Lifetime transfers Gifts of any value are deemed to be exempt from IHT if made seven or more years prior to death. Otherwise, IHT is payable in full on gifts made less than three years prior to death, and on a sliding scale if made between three and seven years prior to death. Gifts in which the donor retains some beneficial interest, such as a house in which the donor continues to reside rent-free, are considered to be “gifts with reservation” and are liable to full IHT. Business property relief The transfer of shares owned for two or more years by the deceased in an ongoing business concern is exempt from IHT. This is crucial for business owners, as the vast majority of trading companies and partnersh ips qualify f or this relief. Investment companies or properties – both commercial and residential – generating rental income normally do not qualify for business property relief. Annual exemption A single gift of £3,000 (US$5,947) per annum can be made which is exempt from IHT. Any unused annual exemption can be carried forward one tax year, enabling a maximum of £6,000 (US$11,894) to be gifted. Deeds of variation The beneficiaries of an estate are able to retrospectively revise a will after death, usually for religious, family or tax reasons. In order for a deed of variation to be accepted by the Inland Revenue, all beneficiaries must be over 18 and sane, and give their written consent within two years of death. Deeds of variations are typically very costly and time- consuming. Advanced inheritance tax planning

Shariah Tax Planning in the UK by Riyazi Farook

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