Musharaka—tax consequences of diminishing shared ownership arrangements — 2022
Produced in partnership with Sarah Squires of Old Square Tax Chambers
Last updated on 09/08/2022

The following Tax practice note produced in partnership with Sarah Squires of Old Square Tax Chambers provides comprehensive and up to date legal information covering:

  • Musharaka—tax consequences of diminishing shared ownership arrangements
  • What is musharaka?
  • UK direct tax rules applicable to musharaka
  • Conditions for musharaka to qualify as diminishing shared ownership arrangements
  • Beneficial ownership
  • Involvement of third parties
  • Corporation tax treatment—deemed loan relationship
  • Corporation tax treatment—ascertaining the amount of the alternative finance return
  • Corporation tax treatment—musharaka not a partnership
  • Restrictions if arrangement not on arm’s length terms
  • More...

Musharaka—tax consequences of diminishing shared ownership arrangements

FORTHCOMING CHANGE: The draft order, if enacted following HMRC’s consultation, would widen the scope of tax legislation applying to alternative finance arrangements, specifically the purchase and resale arrangements and diminishing shared ownership arrangements, to allow:

  1. Home Purchase Plan providers that are not financial institutions but are regulated by the Financial Conduct Authority (FCA) to come within the scope of provisions for alternative finance arrangements and receive the same tax treatment as similar products provided by financial institutions, and

  2. alternative finance arrangements facilitated by an FCA-regulated peer-to-peer platform to come within the scope of provisions for alternative finance arrangements and receive equivalent tax treatment to conventional peer-to-peer lending facilitated by a regulated platform

Shari’a-compliant financing arrangements (also known as Islamic financing arrangements) can take a number of forms. The UK has introduced specific provisions known as the alternative finance arrangement rules to deal with the direct tax treatment of certain forms of Shari’a financing. The UK alternative finance arrangement rules are intended to allow Shari’a financing arrangements to be treated for UK direct tax purposes in the same way as an equivalent conventional financing arrangement. This treatment is dependent on the financing arrangements satisfying the relevant conditions in the legislation applicable to alternative finance arrangements. The rules currently cover five different types of financing arrangements.

Some areas of tax legislation, such as

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