BTL Clause 24 and Sharia mortgages

Hi Peter

Clause 24 applies to all finance costs, not just interest. Therefore, Sharia mortgages are unlikely to be exempt from the restrictions on finance cost relief for individual landlords in my opinion.

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Sharia mortgages have fees not interest, because for religious reasons you can't be seen to borrow money and have interest charged.

So if deemed Fees not Interest, does this mean they are treated as A finance Cost & caught up in Clause 24?

This seems very interesting as sharia mortgages are open to everyone not just muslims. I just did a quick google search and it seems there are several different forms. Under the diminishing Musharaka plan for instance you buy a 10 percent (say) share of the property and the bank buys a 90 per cent share. Each month you pay the bank rent on their share, plus you buy additional shares in the value. So if you then rented out the property, would the rent you pay the bank be considered a finance charge under clause 24 ? I am guessing that ground rent on a leasehold property is not considered a finance charge ? Under an Ijara, the bank purchases the property you want then leases it out to you. At the end of the term the bank transfers ownership of the property to you. So again you are paying rent to the bank not interest. In a Murabaha plan, the bank will buy the property you want then immediately sell it on to you for a profit. You then pay fixed monthly repayments on the higher price, but with no interest to pay back to the bank. Whether the costs involved compare favourably with a BTL mortgage would require a bit of further research and all the schemes are basically similar to a repayment mortgage rather than an interest only one. But this all hangs on whether finance costs in clause 24 include rental payments. It occurs to me that anyone operating a rent to rent scheme would want to know this too.

Reply to the comment left by "Mike Tighe" at "16/11/2015 - 12:12":

Some types of Islamic Finance MIGHT work to avoid c24 for new purchases, but why wouldn't you just purchase via a Ltd Company and have a wider variety of funding options (besides religion of course!)?

Using the various forms of Islamic Finance that you've referred to above as a refinance option sale would trigger CGT if there have been gains. If there are no gains, why not just sell to a new Ltd Co. in order to maximise available funding options?
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Reply to the comment left by "Mark Alexander" at "16/11/2015 - 12:53":

Yes Mark, I agree that if you don't have a capital gains issue, transferring to a Ltd Co would probably be a more flexible option. And depending on your circumstances the same may be true for new purchases. But it's possible any members on here who already have a Sharia type arrangement may have an advantage under clause 24 but would be well advised to check it out with their accountants. Although I wonder if a challenge by HMRC at some stage might be the only thing to provide clarity ! Incidentally, what do you think would apply in a rent to rent situation, given that the costs of the party subletting are only rent, maintenance, agents fees etc.. and no finance costs ?

Re incorporation, Accounting Web flagged up the Chancellor's limited options for plugging the hole left bu the HoL and homed in on Entrepeneur's Relief and Incorp of a residential lettings businees as potentials. The 25th will be interesting as we have certainly been looking at the Ltd route.

Reply to the comment left by "money manager" at "16/11/2015 - 15:28":

Depressing yes I see its CGT on incorporation and SDLT for partnerships

Reply to the comment left by "Mike Tighe" at "16/11/2015 - 14:05":

Hi Mike

A Sharia BTL mortgage based on the examples you have given would already effectively be a rent to rent.

If the person with the Sharia mortgage then rented to an R2R operator then you would end up with a rent to rent to rent to rent. That's far too complicated for me to get my head around, never mind insurance companies and the likes. I would feel very sorry for any accountant who has to prepare tax returns for clients on that basis!
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Reply to the comment left by "Mark Alexander" at "17/11/2015 - 14:17":

I may be wrong, but I don't think Mike was referring to a rent to rent to rent to rent situation. My understanding of his question was whether the "rent" paid by a person (sub-landlord) who sub-lets with permission from the head landlord, has this "rent" classed as finance costs for the purposes of clause 24. In other words, does rent paid by a leaseholder (who sub-lets), count as "finance costs" which would be caught by clause 24?

The person renting from the head landlord, i.e. paying rent to the owner, is in effect the tenant. If the tenant then sub-lets the property (in whole or in part), then he becomes a sub-landlord (as well as the tenant of the head landlord). If the rent paid by the sub-landlord to the head landlord is classed a a finance cost for the purposes of clause 24, then this would surely mean that every tenant that sub-lets or takes in a lodger would also fall within the remit of clause 24 and be taxed accordingly?