Islamic financial products continue to gain popularity and this poses an important question for landlords who have used such or are considering such products to fund their buy to let portfolio.
Islamic finance arrangements do not charge interest so how are the finance costs in an Islamic finance transaction treated for tax purposes?
The answer lies in Part 10A of ITA 2007 which relates to the treatment of interest in alternative finance arrangements with financial institutions. HMRC deems these charges incurred to be in effect interest.
Typically under an Islamic finance transaction the institute offering the finance will purchase the property from the vendor and immediately sell it to an individual at an agreed price. Effectively there is a charge to cover the costs incurred by the financial institution in doing so.
The financial institution should provide a breakdown of the costs between capital and finance charge for the transaction. These costs are then an allowable deduction in the rental business subject to the normal restrictions.
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