The government is consulting on proposals to reform the tax treatment of alternative refinancing arrangements using Islamic finance, particularly capital gains tax
This consultation seeks views on reforms that would address the difference in tax treatment when a commercial or residential property is refinanced using alternative rather than conventional finance methods.
‘Alternative finance’ is a method of raising finance that characteristically involves the sale, purchase and renting of assets in circumstances where ‘conventional’ financing would involve lending at interest.
Under the current rules, entering into certain types of alternative finance arrangements can result in capital gains tax (CGT) and capital allowances consequences that users of conventional financing would not face.
The government is aware of a difference in tax treatment when a commercial or residential property is refinanced using alternative rather than conventional finance methods, such as Islamic finance. In these situations, a capital gains liability may arise, and capital allowances could be lost for those using alternative financing, when this would not have been the case for those using conventional financing.
When refinancing a property, there are particular problems with CGT, as under the current rules transferring an interest in the property to the financial institution creates a disposal event.
The overall purpose of these changes is to ensure that, where certain conditions are met, the person obtaining the finance (P) is treated as having owned the interest in property throughout the period of the arrangements, and neither P nor the financial institution are treated as having made any disposal or acquisition.
To deter avoidance or in case of a default, the government proposes that the original base cost of the land before the arrangement was entered into will be used to calculate any gain or loss that may accrue as a result of the default or avoidance.
Nigel Huddlestone, financial secretary to the Treasury said: ‘HM Treasury wishes to ensure that any changes to the alternative finance tax rules are effective and proportionate for the financial institutions administering these products and customers they serve.
‘At the same time, it is important that this is carefully balanced with the government’s commitment to maintaining a robust tax system with the necessary anti-avoidance mechanisms in place.’