The measures are aimed at anyone (institution) wishing to obtain finance by issuing Alternative Finance Investment Bonds (AFIBs) (the UK euphemism for Sukuk) using land assets as securities under the arrangements for issuing the bonds in the United Kingdom.
They include: (a) provision of relief from stamp duty land tax (SDLT) in respect of transactions undertaken as part of the issue of alternative finance property investment bonds; provision of relief from tax on capital gains in respect of transfers of land to and from Sukuk issuance vehicles; and (c) ensuring that the person obtaining the financing will continue to be entitled to claim capital allowances while the land is held by the Sukuk issuance vehicle.
It is a stated ambition of the Labour government to further promote the City of London as a center for global Islamic finance, trade and investment and to create a level playing field between conventional and equivalent Islamic financial products.
According to the budget statement, "Legislation will be introduced in Finance Bill 2009 to provide relief from the provisions of SDLT and the Taxation of Chargeable Gains Act 1992 for persons wishing to raise finance by using land assets in the United Kingdom. Further legislation will also set out the capital allowances consequences of the SDLT and capital gains measures." The measures, according to the UK Treasury, will take effect on or after the date that Finance Bill 2009 receives royal assent.
The chancellor first outlined the intention of the UK government to introduce legislation to provide relief from stamp duty land tax for alternative finance investment bonds in the Pre-Budget Report (PBR) in November 2008. This despite a disappointing concurrent announcement that the UK Treasury would not be issuing a debut sovereign Sukuk in the wholesale sterling market at the present time.
According to Treasury Minister Ian Pearson, "the government is committed to promoting the City of London as a center for global Islamic finance and to working toward a level playing field between conventional and alternative financing instrument. New legislation will be introduced in the Finance Bill 2009 to provide relief from stamp duty land tax for alternative finance investment bonds. And in conjunction with the FSA, the government will examine the regulatory treatment of Sukuk (alternative finance investment bonds) in the UK and will consult on this issue in the near future."
The announcement has been welcomed by the Islamic finance market in the City and beyond. Angela Savin, senior tax associate at City law firm, Norton Rose LLP, stressed that "for the last few years, HM Revenue & Customs (HMRC) have been very receptive to representations made for the tax treatment of Islamic finance to be no more onerous than conventional finance. These changes should ensure that there are now no UK tax obstacles to issuing Sukuk backed by UK land."
Norton Rose, which is one of the top international law firms servicing the global Islamic finance industry, is confident that the UK "tax changes will give a considerable boost to the UK Islamic finance initiative and ensure that in these difficult times alternative sources of finance will be available in the UK."
Foreign bankers such as Nazmi Camalxaman, general manager of CIMB Group's London branch, welcomed the move and stressed the importance of the UK issuing a Sukuk. "The market is waiting for the debut UK sovereign Sukuk issuance, because it will set the benchmark especially of other potential originators in the developed countries and in the EU, and start a nascent Euro-Sukuk market." CIMB would also like the UK government to be more proactive and follow in the footsteps of the World Bank, the International Finance Corporation and the Islamic Development Bank (IDB) to issue a Malaysian ringgit-denominated Sukuk "because there is high demand for such AAA-rated issuances in Malaysia."
Richard Thomas, CEO of Global Securities House (UK) and chairman of Gatehouse Bank, is confident that the UK sovereign Sukuk is "work in progress." He stressed the fact that Whitehall is pushing ahead with the Sukuk measures in the Finance Bill 2009 indicates that the Brown government is committed to a Sukuk issuance, albeit this would depend on the pricing and timing.
"The Treasury only finished its consultation in January 2009. The Finance Bill will be published sometime in May 2009. By the time the bill gets royal assent and the structure of the Sukuk is finalized it would be almost the end of 2009. So even if the UK government wanted to issue a Sukuk, realistically it would not have happened before the end of 2009 or early 2010. In any case, with the current UK government pricing for a debut sovereign Sukuk, no investors would buy it. The Islamic finance sector is return-driven. Therefore it would not be efficient or offer value for money to issue a Sukuk currently," he explained.
But Thomas wants to see a UK sovereign Sukuk issuance also for another reason. "We need a risk-free bond for our balance sheet purposes. Until we get a benchmark yield such as the UK government issuance, you will not see the establishment of a Sukuk fund of funds," he explains.
By Mushtak Parker
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