Inheritance tax and Islam
For Muslims living in the UK, they are bound by the rules and laws relating to inheritance tax and wills. These rules are not based on Sharia law or Islam but are the rules of the country in which you reside. Whilst Sharia rules include provisions relating to managing the estate on the death of someone, the rules in the UK are more stringent and need to be understood.
Islamic Sharia law states that Muslims need to ensure that their assets are distributed according to Islamic rules on their death. Sharia rules outline how assets should be divided amongst surviving relatives.
For Muslims living in Muslim countries, the laws relating to inheritance and intestacy are based on Sharia rules so this makes things easier when it comes to the division of assets. However, for Muslims living in non-Muslim countries such as the UK, if they die without a will then their assets will be distributed in accordance with the domestic laws and not Sharia law.
WHAT IS INHERITANCE TAX?
Inheritance tax is essentially a tax applied on the estate of someone who dies. This tax is paid on the property and assets of the deceased above the inheritance tax threshold.
The aim of inheritance tax is to generate revenue for the government and to implement broader policies. For those wanting specific information about their tax liability they should speak to professionals who are experts in the field of tax and estate planning/ decision making.
HOW MUCH IS TAX FREE ON INHERITANCE?
Currently, in the UK inheritance tax is charged on 40% on all assets that exceed what is known as the nil rate band of £325,000.
No inheritance tax is payable on the first £325,000 of the estate. Above that, 40% inheritance tax is charged. This amount is lower if leaving your home to direct descendants.
ARE MUSLIMS EXEMPT FROM INHERITANCE TAX?
Muslims in the UK are not exempt from paying inheritance tax. However, there are some rules in the UK tax regime that can accommodate cultural or religious practices. These include:
- Charitable donations: zakat and sadqa payments and charitable bequests in wills made to qualifying charities can benefit from exemptions.
- Spouse exemptions: Normally, the transfer of assets between spousal beneficiaries is exempt from inheritance tax.
- Business relief: there are also some exemptions and reliefs that apply to businesses and agricultural assets.
DO MUSLIMS IN THE UK PAY INHERITANCE TAX?
Yes, Muslims in the UK are subject to the laws and rules relating to inheritance tax.
Inheritance tax in the UK is not based on religion but on the actual value of the estate and the rules of the country you live in.
HOW TO LEGALLY AVOID PAYING INHERITANCE TAX?
There are some strategies you can use legally to reduce your inheritance tax bill.
- Create a tax efficient Islamic will
- Effectively utilise the nil rate band
- Speak to professionals and experts for advice on managing your assets
- Use the spouse exemption
- Invest in business or agricultural property
- Set up tax efficient trusts
- Make use of charitable donations
- Gift your assets in a tax efficient way
Always speak to Sharia tax experts when planning your will and estate distribution.
WHO IS EXEMPT FROM PAYING INHERITANCE TAX IN THE UK?
There are some people and assets that are exempt from inheritance tax including spouses and direct dependents. The general rule is that if your estate exceeds the £325,000 threshold you need to start thinking about estate planning.
Exemptions under the tax rules are subject to conditions and criteria, so always speak to experts before making any decision.
WHAT ARE THE RULES ABOUT INHERITANCE IN ISLAM?
Islam sets out some clear provisions when it comes to inheritance and death. The first step is to ensure you have a legally valid will in place.Islam sets out the order or priority when it comes to the distribution of funds. The order of payments is as follows:
- funeral costs and expenses
- Outstanding debts
- Bequests to be honoured (but not where the value exceeds one third of the value of the estate/remaining assets
- distribution of remaining assets to family
Whilst Islam predetermines how our estate is divided on our death, it is still important to ensure we have a will in place.
WHAT HAPPENS IF YOU HAVE MORE THAN ONE WIFE?
In the UK as the inheritance tax rules are not based on religion, this means that if Islamically you have more than one wife the tax rules will be applied as per UK laws.
Only the legal marriage (as per UK rules) will be recognised for the purposes of determining inheritance tax responsibilities and liabilities.
CAN HALF-BROTHERS INHERIT IN ISLAM?
The rights of the half brothers inheritance depends on many factors including the presence of other heirs in the family, and the proportion of shares (see above) and order or priority.
Half brothers and sisters can inherit if there are no full brothers and sisters.
RIGHTS OF DAUGHTERS IN ISLAM?
Islam focuses on the equality of gender when it comes to inheritance rights. Daughters are entitled to inherit from parents who are deceased alongside other relatives.
Islam states that daughters are allocated a share in accordance with the principles outlined below.
As primary heirs, daughters will take priority over distant relatives.
The Division Of Jewellery In Islam
When it comes to jewellery, Islam provides guidelines for the distribution of the estate of the deceased and these guidelines include jewellery. Those distributing the estate should be mindful of the fixed shares for the different categories of heirs as stipulated by Islamic rules.
Jewellery is considered part of the estate of the deceased and is subject to Islamic rules of asset division. Of course, the deceased can leave specific bequests in their will when it comes to jewellery and it is expected that the other heirs honour the wishes of the deceased and consent to the bequests.
Islamic Rules Relating To Wills And And Payment To Heirs
Sharia law states that you can distribute up to one third of your estate however you want to on your death. This applies as long as the third share is passed on to someone that is not already entitled to a fixed share of the estate.How is the remaining inheritance divided in Islam?The remaining two thirds of the estate on death should be distributed as follows:
- the surviving wife is entitled to receive one eighth of the husband's estate. If there are no children from the marriage then the wife receives one quarter of the estate.
- the surviving husband will be entitled to a quarter of his deceased wife's estate. If there are no children of the marriage then the husband received one half.
- depending on what the entitlement of the surviving spouse is, the mother of the deceased is entitled to one sixth of the estate. This figure is one third in the event that the deceased had no children.
- If the deceased's father is alive, then the mother is entitled to one quarter of the estate (where there are no children).
- If the deceased does not have a spouse, children or father, then the mother will inherit one half of the estate.
- If the deceased leaves behind no children, the father of the deceased will receive the surplus after distribution.
- If the deceased leaves behind one (or more) son, then the father is entitled to one sixth of the estate (but no entitlement to any surplus).
- If the deceased is survived by a spouse and daughters, then the father of the deceased will receive one sixth of the estate. In addition, the father will receive one sixth of any remaining surplus once the division of the estate has completed.
- surviving children are entitled to the surplus of the estate once the remaining spouse and parents have received their share.
- male grandchildren and children are entitled to over 50% of the estate when compared to the female children and grandchildren.
- If there are two plus surviving daughters then they will share two thirds of the estate equally between themselves (as long as there are no other surviving relatives).
CAN YOU REFUSE INHERITANCE IN ISLAM?
The simple answer to this is yes, you can refuse inheritance. However, any voluntary refusal should be made after careful consideration.
WHICH COUNTRIES HAVE NO INHERITANCE TAX?
There are many countries across the globe that do not have inheritance tax regimes. These include:
- UAE
- Saudi Arabia
- Qatar
- Oman
- Bahrain
- Monaco
- Brunei
- Slovakia
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Green investments or sustainable investments are those that are deemed to be socially responsible with a positive impact on the environment and wider society. As a complete financial system, Islamic finance facilitates green investments and what this means for investors is an increase in sustainability growth. When green investment and Islamic finance come together they drive sustainable growth.
Islamic finance is growing in popularity and was a system devised many centuries ago. In comparison, the green industry is relatively new. Islamic finance's emphasis on economic justice and focusing on marginalised communities and organisations is the foundation of its principles.There are increasing collaborations between the green industry and the Islamic finance industry.
They complement each other and offer benefits for organisations, and both client and customer.
WHAT ARE GREEN INVESTMENTS?
Green investments are also known as socially responsible investments or sustainable investments. They are centred on those investments that positively affect society, organisations, and people.
Green investments range from renewable energy, to clean technology, sustainable agriculture, green bonds to impact investing.
Green investing aims to ensure that investors who want to align their financial transactions with their ethics can do so. That is not to say that green market investments do not provide good financial returns. On the contrary, like Islamic finance, green investing has proven to be revenue generating whilst also being eco-friendly.
Types Of Islamic Finance Based Green Investments
The kinds of Islamically compliant green investments are wide ranging. They cross various industries from agriculture, to environmental protection, to clean technology. Both Islamic finance and green investments focus on equity, regulation, risk management ,and understanding the needs of the parties.
ESG, that is environmental, social and corporate governance are all key considerations. Islamic finance is the financial tool that an institution can use to remain Sharia compliant and green focused.
With the alignment of both the green industry and Islamic finance, there are a great deal of products on the market now that are tailored to be green and Sharia compliant.
Let's have a look at some green products that are Islamic finance compliant:
- Ethical mutual funds: these kinds of mutual funds are managed in accordance with Sharia rules. When it comes to the actual investment, these kinds of funds only invest in projects and companies that meet both the Islamic finance and green criteria.
- Green sukuk: these sukuks are a type of bond that raise funds for projects that are environmentally sound and sustainable. The sukuks have to be Sharia compliant for them to be halal. Projects range from providing capital for clean water initiatives, decarbonisation, to renewable energy, technology, and agriculture.
- Real estate: green real estate funds invest in sustainable real estate projects and are financed by money that is generated and spent in accordance with Sharia rules. This means any loan comes without any interest payments being charged or paid. Often, ethical real estate investments take place in areas of crisis with a view to enabling local communities to transition away from the crisis in an affordable and ethical way.
- Microfinance: Islamic microfinance services and products are increasing in popularity. This is mainly due to them being regulated in the same way in the UK as other non-Islamic finance products (although, you must always do your own research - knowledge is key). Islamic microfinance can offer funding to SME businesses and individuals who are engaged in eco-friendly ventures and sustainable growth.
- Islamic stocks: if you look carefully you will see there are various Islamic stocks on the market that are green and sustainable. These stocks are usually in companies that are green focused and ethically sound.
- Islamic crowdfunding: when looking at sustainable and ethical finance models, then Islamic crowdfunding ticks all the boxes. For those with aspirations of raising funds for green projects, Islamic crowdfunding offers a great alternative for raising start-up funds.
Commonalities Between Islamic Finance And Green Investments
Both green investing and Islamic finance have many points of convergence and commonality. As models of investment, they complement each other. Both encourage and promote social responsibility and ethical investing.
It is important to remember that both green investment and Islamic finance have foundations in ethics, justice and social responsibilities. It therefore makes perfect sense that they are great partners in the financial world.
In addition, both Islamic finance and green investing principles share the following key principles:
- Prohibiting harmful activities and industries: one of the main rules of Islam is that we should stay away from harmful activities and industries. This means a prohibition in investing, managing or working in industries such as the porn industry, and the alcohol and gambling industries. Similarly, green investments tend to stay away from these industries as they serve no real green benefit to society.
- Sustainable development goals: Islamic finance and green investing play a significant role in promoting sustainable development goals. So, how is this achieved? it is done through the encouragement and support of economic growth, social wellbeing and environmental sustainability.
- Assessing the impact on society: both Islamic finance and green investments are focused on benefiting society as a whole. The aim is to positively impact society and sustainable development, whilst trying to ensure that wealth inequality is reduced and there is economic justice. Investing in industries that tackle climate change, poverty reduction, renewable energy, education, research, and innovation are referred over more profit based industries.
- Ethical screening behaviours and tools: in order to ensure that the investments are compliant with both Sharia laws and green principles, ethical screening is high on the agenda. Both the green investment industry and Islamic finance focus on ensuring that investments and industries are screened, their governance is clear, and policies are not exploitative.
HOW DOES ISLAMIC FINANCE RELATE TO SUSTAINABILITY?
Islamic finance is based on Sharia rules which provide the legal and financial framework within which to live, transact and behave. Islamic finance is more particularly focused on providing rules pertaining to the economy, business and finance.
Due to the very nature of the ethical way Islamic finance operates, this immediately irradicates the purely profit driven and interest based activities of conventional forms of finance.
Islamic finance has always been a key player in achieving and promoting sustainable development goals by:
- promoting poverty eradication
- promoting UN goals relating to sustainability
- Ensuring there is financial inclusion in all countries
- Holding banks accountable and insisting on interest free services and products
- promoting health and wellbeing including clean sanitation and renewable energy
- promoting better education and the eradication of interest based debt
- having strategies that focus on gender equality
- encouraging sustainable agriculture and food security projects
For anyone looking for green projects to invest in, in a halal way, then you must consult with financial advisors who are experienced and knowledgeable in both areas.
In the West investors are looking for more conscientious ways to invest. Neither green investment nor Islamic finance are taught at school or featured heavily in the news. However, the impact of the alignment of these 2 distinct industries is becoming more known in investment markets.
This strategic alignment is opening up major market opportunities for investors. ESG financing is expected to see huge growth in the next decade, as is investment in clean technology and net zero industries. There is clearly an appetite for financial products that are Islamically sound, but also sustainable and green.
Islamic finance, when coupled with green investment, is bridging cultures, finance models and inclusivity. It is an area of finance that is seeing exponential growth in major financial hubs such as London, Washington, Geneva, and Dubai.
Waqf is an ongoing, sustainable, charitable donation and has been used throughout Islamic history to benefit and support communities, and aid community development. Islamically, waqf is a mechanism through which the condition of society can be improved. Waqf refers to an endowment made to a charitable, educational or religious cause.
It is a voluntary action that the whole community can benefit from, for example, the building of a university, research centre or hospital.
WAQF - WHAT DOES IT MEAN?
The Arabic meaning of waqf means 'restriction'. This is based on the principle that all property essentially belongs to Allah. So, whilst a Muslim may donate to a charity for community development, the donation is not owned by the Muslim but by Allah.
For example, if you donate some land or an asset for the purpose of community development, then the community will reap the benefits. The donation releases an ongoing community benefit that supports future generations. A famous example of waqf is the Al Azhar Mosque and University in Cairo, Egypt. This University was founded as waqf in 1908, with funds donated by wealthy Egyptians.
HOW DOES WAQF WORK?
Waqf involves donating a fixed asset which in turn provides a financial return.
Waqf is based on the principle that you can donate an asset that can then continue to provide a charitable service for the foreseeable future. The waqf project goes on to support others in the community through various activities and services.
This is how waqf works:
- Individual donates an asset to a waqf project.
- The donations are collated and invested in a Sharia compliant way.
- Any profits and returns on the investments are used to support charitable organizations such as education, relief of poverty, providing healthcare services and emergency solutions.
- Some profits are reinvested in a Sharia compliant manner.
The outcome is that your donation should keep going for a number of years, benefiting humans for generations. The incentive for Muslims wanting to donate to a waqf is that the donation is considered to be an ongoing charitable endowment that benefits others for many years.
History Of Waqf
Although waqf is not explicitly prescribed in the Quran like charity is, it is considered to be comparable to sadaqah. Waqf investments are deemed to be a crucial part of Islam as the Prophet (SAW) stated that:
"When a person dies, all their deeds end except three: a continuing charity, beneficial knowledge, and a child who prays for them"
Waqf investments have an important continuing charity element.
Waqf As A Social Finance Institution
Many Muslim majority countries in the world are still developing and income-poor. There is a lack of availability of private sector investment businesses and options. Waqf can be considered a social finance institution that can fill the gaps in development spending. Waqf provides an avenue for the effective utilisation of perpetual social savings.
With transnational waqf investments and support programmes, there is potential for philanthropic Muslims to support the development of communities across the world.
When viewed through an Islamic redistribution framework, it is clear that waqf harnesses selfless charitable giving in a way that is effective and impactful. Targeting social segments within society and aiming for long term improvement brings benefits to donors and society as a whole.
Donating assets for permanent societal benefit facilitates flexibility and stabilisation for deprived and needy communities. Waqf essentially transforms social capital into social infrastructure, complementing zakat and sadaqah donations.
Sourcing Sharia compliant waqf investments and donations online can be difficult, so you must ensure that you undertake the due diligence required.
Unsecured loans are popular with businesses looking to raise money. The borrower receives a lump sum of cash, from their bank or other lender, and they repay it over a number of months or a few years. The money is put to work in the business and if all goes well, it should help generate revenues and profit that enable repayment of the loan plus any associated costs.
What is an unsecured business loan?
An unsecured business loan is where a business borrows money without providing security. This security is usually in the form of an asset, such as a building or valuable piece of equipment, which the business owns. This asset becomes a form of guarantee to the lender. Should the business be unable to repay the loan, the lender is given the right to take control of the asset and use it to recover some or all of the debt - typically by selling it.
An unsecured business loan is not linked to an asset in this way, which means the lender is taking a greater risk. If the business can't afford to repay the debt it will be more difficult for the lender to get the money back.
In recent years, it's become common for company directors to sign personal guarantees when taking out an unsecured loan. This gives the lender more confidence they have some recourse should the business become unable to make repayments.
Reasons for taking an unsecured business loan
One of the main reasons why businesses borrow is to fund growth plans. This growth requires investment in advance - it could mean opening a new office, hiring new staff or purchasing new equipment. Many businesses don't have the working capital needed for such investment, meaning they need to find a way to raise the funds. An unsecured loan is a common choice.
As part of the growth plans the business owner will usually have prepared a business plan. This sets out how they intend to spend the capital they have borrowed and includes a budget for repayments.
If a business wants to borrow because it faces cashflow difficulties in its daily operations, it's unlikely to be approved for an unsecured loan. Before they agree to make a loan, potential lenders will perform a series of checks on the business and business owners, in order to assess the credit risk. This includes looking at the firm's credit history, its credit rating, and reviewing information supplied by the business such as financial accounts, budgets and cash flow projections. These checks help the lender to quantify the financial health of the business.
For businesses facing short-term cash flow problems, other forms of funding could be more accessible, such as invoice finance or merchant cash advances.
Benefits of an unsecured business loan
Ideal for smaller amounts - Unsecured loans are typically for smaller amounts, usually less than around £15,000.
Quicker to arrange - Because the amounts are smaller and there are no assets involved, the legal and financial application processes are faster. It's often possible to arrange an unsecured loan in just a few days.
Good for businesses with trading history - Finance providers look more favourably on businesses and owners who can demonstrate a history of growth over a number of years. Such businesses will have a better credit score, because they have managed their finances well.
Assets not put at risk - An unsecured loan leaves control of all the assets with the business.
Alternatives to an unsecured loan
While they can be a convenient way to raise money for your business, an unsecured loan is not always the most cost-effective solution, as the fees tend to be higher to reflect the risk to the lender. These loans can also be hard for startup businesses to access, because they lack the trading history needed to demonstrate creditworthiness.
Alternatives to unsecured loans include:
- Equity finance, such as funding from an angel investor or venture capitalists.
- A private loan, from friends or family.
- A secured loan.
- An overdraft facility with your bank.
- A mortgage on property.
- A startup loan, designed for very new businesses.
- Peer-to-peer crowdfunding.
The range of funding options continues to increase, with a growing number of fintechs bringing innovation to the business finance market.
Funding for growing businesses from Qardus
We help business owners get access to growth finance. The funding we provide is of between £50k and £200k on terms of between 6 and 36 months.
You can use this finance for a variety of business purposes, such as purchasing new equipment or other assets, hiring and training new employees, investing in improved processes or boosting your inventory. Our funding allows business owners to invest for growth. Because we want to see businesses do well, we work with firms that have a proven product and a strong management team.
Our clients are drawn from across the UK, operating in different industries. What they have in common, in addition to their growth ambitions, is a commitment to the wider community, good governance and strong ethical principles.
The funding we provide is certified Sharia-compliant, meaning it's operated in line with Islamic finance principles. This does not mean it's only available to Muslim-owned businesses. Many of our clients are outside the Muslim community but they share our values, and operate in industries we are open to supporting.
If your business is looking for growth funding that's fast, affordable and ethical, get in touch with us today.
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