How are financial institutions working within Sharia law?
As a result, some financial institutions have developed financial arrangements to facilitate the purchase of property in a way that’s compliant with Sharia law. While increasing in popularity, there’re still relatively few financial institutions willing and able to offer a viable option.
A common structure used by financial institutions is known as diminishing shared ownership. This is where you, as the purchaser, put down a deposit of generally at least 20% of the total purchase price, and the financial institution purchases the remaining share in the property. You then pay rent to the financial institution for the share of the property you don’t own.
As the purchaser, you can make payments to the financial institution to purchase further shares in the property in much the same way as capital repayments are made on a conventional mortgage. This in turn would reduce the amount of rent to be paid.
The amount of rent charged can be fixed at the outset with a payment plan to reflect any capital payments to be made to eventually own the property outright. The rent is determined by a combination of market interest rates and the financial institution’s margin. Most financial institutions review the rent amount on a quarterly basis.
Once the entire property is acquired by the purchaser, full title of the property will be transferred to them and no further rent is payable.
There are specific provisions in tax law for a Sharia compliant structure, such that there is no Stamp Duty Land Tax (SDLT) on the transfer from the financial institution to the purchaser. The rent is also treated under the interest exemption for financial institutions.