Proposed changes to ISA rules will enable the launch of Shariah-compliant Innovative Finance ISAs (IFISAs).
HMRC has recently consulted on widening the scope of tax legislation for alternative finance arrangements, to include Shariah-compliant products.
And last month, City minister John Glen said that proposed rule changes will aid the growth of the Islamic finance industry in the UK, while correcting the “less favourable tax treatment” that accompanies Shariah-compliant peer-to-peer investments.
Speaking about the draft Alternative Finance Order 2022 in parliament, Glen said it is likely that changes will be made to ISA regulations to ensure that alternative finance arrangements can qualify for inclusion in IFISAs.
“Lenders and borrowers entering certain finance arrangements through Shariah-compliant P2P platforms also face less favourable tax treatment, which means that home purchase plans provided by FCA-regulated providers, and certain alternative finance arrangements facilitated by an FCA-regulated P2P platform, are on an unequal tax footing with similar products provided by financial institutions and conventional P2P lending,” Glen said.
“The changes made by the draft order will allow both of those types of firms to access the alternative finance arrangements provisions for the purposes of income tax, capital gains tax and corporation tax.
“I sincerely believe that this order will help to level the playing field for those products and will aid the Islamic finance industry to move forward in the UK, and continue to develop, to cement our reputation as global leaders in this area.”
Shariah-compliant finance is based on Islamic rules where interest-based loans are prohibited.
Instead of a traditional loan agreement, the borrower, known as a buyer, and investor agree a deferred purchase and sell a debt obligation based on an agreed cost and mark-up of a specified commodity.
The first directly authorised Shariah-compliant P2P lending platform, Nester, launched to all investors in April. It had previously lobbied HMRC to change its tax rules to accommodate Shariah-compliant IFISAs.
Youness Abidou, founder and chief executive of Nester, welcomed the upcoming tax change and said this will allow Nester to launch its own IFISA.
“This is the first big step forward for Islamic finance in the fintech space,” he said.
“We are extremely pleased that HMRC and the Treasury are continuing to support the Islamic finance industry in the UK and supporting Nester’s innovative products. The IFISA will be integral in the next phase of Nester’s growth.”
Read more: Innovative Finance ISAs: Six years on