Autumn Budget 2024

Lord Sharkey Excerpts

Monday 11th November 2024 Lords Chamber

[Lord Sharkey (LD)]

My Lords, I will speak briefly about alternative finance. The Treasury defines alternative finance as

“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”.

It goes on to say that alternative finance products are

“based on Islamic financing but can be used by both followers and non-followers of the Islamic faith”.

Islamic financing has long been seen as important to the United Kingdom. In October 2013, the World Islamic Economic Forum was held in London. It was the first time the forum had ever been held outside the Islamic world. At this forum, Prime Minister Cameron said:

“I don’t just want London to be a great capital of Islamic finance in the Western world. I want London to stand alongside Dubai and Kuala Lumpur as one of the great capitals of Islamic finance anywhere in the world”.

We have not quite achieved that yet.

One of the barriers to the growth of this market has been the CGT treatment of alternative finance mortgages. Those who opted for these Islamic-style mortgages found themselves in difficulty when it came to remortgaging. Capital gains became an issue because of the structure of the finance, under which customers sell a beneficial interest to the bank for the term of the finance. This contrasts with conventional finance, where no CGT is triggered on remortgaging. This discrepancy in treatment causes serious difficulties.

I know of one Islamic finance case that is appealing a CGT assessment of £600,000, which would not arise if there was an equal treatment of alternative and conventional finance. So I am very pleased that the Government have committed, on page 231 of the Red Book, to introducing new tax rules which will level the playing field, at least prospectively, from last 30 October. This is a good resolution of a problem that has unnecessarily hampered the growth of Islamic finance in the UK and has needlessly disadvantaged those whose faith prevents them from taking out interest-bearing loans. Unfortunately, it is not clear if this levelling up of the CGT tax rules is to be applied retrospectively as well as prospectively. What is the Government’s position on this? I think I can probably guess.

There is a broader point here. Islamic finance must continue to be considered in the formation of policy, certainly with the aim of preventing unintended consequences such as the CGT issue, but with the larger aim of increasing London’s share of the Islamic finance market.

There are two further issues to do with Islamic finance, which may be impeding growth. The first is the Bank of England’s alternative liquidity facility—the ALF—which is an important and innovative element in Islamic bank finance and which is not replicated anywhere else in the western world. The current limit is £200 million across Islamic institutions and there is a strong appetite for increasing that. The Bank of London & The Middle East said that

“we hope that the Bank will extend the size of the facility in due course, enabling banks to place even more money into the facility as they grow and further secure the future of Sharia’a finance in the UK”.

Is this something on which the Government would look favourably?

There is also an issue with settlements. HMRC has said that it does not consider that a diminishing shared ownership arrangement, as is typical in sharia finance, should be a settlement for income tax, CGT or inheritance tax. If this is a correct interpretation of the rules, then HMT should issue binding guidance. Otherwise, rating agencies will continue to take the opposite view, making securitisation very problematic.

I look forward to making further progress against David Cameron’s now 10 year-old growth objective, and I look forward to the Minister’s reply.