Yes, of course Muslims pay stamp duty when they buy a house

There’s a Youtube video doing the rounds on Twitter which claims that Muslims don’t have to pay stamp duty when they buy a house. The claim is false, and most likely racist disinformation¹Initially I thought it might be an innocent error, but the poster blocked me, and has a history of repulsive racist posts, so it’s reasonably clear he knows he’s lying.

I couldn’t see an explanation of this point on the internet, so thought I’d quickly put one together:

Normal mortgage finance

If I buy a house in a normal way then I pay stamp duty²Technically stamp duty land tax, but most people call it “stamp duty” so I will use that term in this article at 5% (or more). I pay a deposit of say 20% up-front. I borrow 80% from the bank under a mortgage loan, and use that plus the deposit to buy the house. Then over the next 25 years I pay interest, and repay the loan, one small piece at a time. After 25 years the mortgage is repaid and I own the house outright.

I pay stamp duty when I buy the house. Obviously I don’t pay it again when the mortgage ends, and I own the house outright.

Islamic Financing

Observant Muslims believe interest is unethical. But they still need to buy houses. So there are a variety of Islamic finance structures that look very similar to a normal mortgage in cash terms, but where the payments are structured differently.

A common one is “diminishing shared ownership” or “diminishing Musharakah”. I pay cash to buy 20% of the house. The bank buys the other 80%. I pay the bank rent for its share of the house, and over time I pay the bank to buy back the rest of those, one small piece at a time. After 25 years, I own the house outright.

Wouldn’t you know it, the rent and purchase prices add up to be very similar to interest and repayments on a normal mortgage, but almost always more expensive (because it’s more complex, and there’s less competition in the UK Islamic finance world).

But, on the face of it, there are two stamp duty charges. One when I and the bank buy the house. And then another series of charges (or single up-front charge) when I buy the slices. That seems unjust, given that both cases are (economically) the same transaction.

So there are specific tax rules that most treat most³but not all; it’s a difficult area, and surprisingly easy to accidentally end up with a double stamp duty charge Islamic Finance the same as normal mortgage finance. In this case, a specific exemption for the second stamp duty charge, so that people using Islamic Finance (whether they are Muslims or not) pay the same amount of tax as everyone else.

There is a practical difference, which is that in the normal case I pay the stamp duty, and in the Islamic Finance case the bank pays it. The bank of course passes the cost to its customer. Often that is paid out over time, which might look like a better deal than a typical mortgage (where the stamp duty must be paid up-front). But that benefit is more than cancelled out in the higher deposit that’s required for an Islamic Finance product – rarely, if ever, less than 20%, and in the fact that payments overall are considerably higher.

Who uses Islamic Finance?

Payments under an Islamic Finance arrangement are economically similar to those under a normal mortgage loan, but typically significantly higher. In part because the products are complicated and riskier for the bank; in part because the market is much less competitive.

For these reasons, most Muslims don’t use Islamic Finance. About 6% of the British population are Muslim. But Islamic Finance makes up only 0.1% of total UK banking assets.

Non-Muslims absolutely could use Islamic Finance if they wanted to – although, given the increased cost, there’s no reason they would. There were some cases years ago of non-Muslims using Islamic Finance because they thought they’d found a way to escape stamp duty. They were wrong.

Scotland

Land law and mortgages all work differently in Scotland, and there’s Land and Buildings Transaction Tax instead of stamp duty/SDLT. I don’t have expertise on any of this. But my understanding is that the end result is the same: someone buying the house using Islamic Finance is in the same tax position as someone borrowing using a conventional mortgage.

Photo © Andy Beecroft and licensed for reuse under this Creative Commons Licence.

• 1
  Initially I thought it might be an innocent error, but the poster blocked me, and has a history of repulsive racist posts, so it’s reasonably clear he knows he’s lying
• 2
  Technically stamp duty land tax, but most people call it “stamp duty” so I will use that term in this article
• 3
  but not all; it’s a difficult area, and surprisingly easy to accidentally end up with a double stamp duty charge