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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WHAT IS ISLAMIC FINANCE?
Islamic finance at its very core is a way of managing money and financial transactions in a way that is compliant with Islamic rules and guidance. There is a significant interplay of sustainability and ethics in Islamic finance.
One of the foundational principles of Islamic finance is that money itself does not have any value. Instead, money is a means through which we can exchange products and services.
Islamic finance rules state that you should not use money to make money. This is why one of the most important Islamic finance principles is the one which prohibits interest in any form.
Paying or receiving interest is not seen as a permissible or equitable way of managing finances in Islam. You cannot make money by charging interest, this is seen as unethical and exploitative but also non-sustainable in the long-term.
Another important element of Islamic finance is that our transactions should not cause any harm to other individuals or wider society.
The focus should be on economic activities that are grounded in tangible assets and services, and partnership arrangements where each party shares in the profits and losses.
Ethics And Islam
Islam provides ethical guidelines within which to operate. These guidelines are based on the teaching within the Quran and from the experiences of the Prophet Muhammad (PBUH).
Underlying Islamic finance is a foundation based on integrity and fairness. The underpinning of Islamic finance with ethical considerations can be seen as contradictory to conventional business models, but ethical finance is a fast-growing industry.
Investors, individuals, and businesses are more socially conscious and want to operate in a more sustainable way.
It seems that everyone wants a more inclusive financial system where there is a real interplay between ethics and finance. Having witnessed the financial collapse of 2008 and the current global pandemic, existing Western finance models have proved to be volatile, unstable, and temperamental.
Islamic finance offers a sustainable, unique and viable ethical alternative. Applying normative ethics to financial and economic transactions brings more equality and sustainability to the table. This is mainly because operating from an ethical perspective is about duties and responsibilities rather than consequences.
Considering the consequences and impact of financial decisions means negative impacts can be identified and eliminated early. This leads to a more robust, fair, and resilient financial system.
Islamic finance recognises that finance has a useful role to play in economics. It requires overarching ethical considerations to be in place to ensure that there is intrinsic value in financial dealings, and these are supported by ethical and moral conduct.
Islam places a great deal of emphasis on ethical conduct. This is because Sharia rules derived from Islamic teachings are based on an ethical framework.
Islam requires us to align our values with the teachings of Islam in all areas of our lives. What this means for parties involved in any kind of financial deal is that the transactions are just, fair and equitable.
Islam And Wealth Distribution
Another important thing to note is that Islamic finance places emphasis on the concept of wealth distribution and social justice.
Practices including the payment of zakat every year, and regular charitable donations in the form of sadaqa aim to distribute wealth fairly. Sharing wealth is a key component of Islam, whether this is through donations or promoting those economic activities, projects, and practices that contribute positively to society.
Justice and fairness are fundamental concepts in Islam.
What Does Islamic Finance Say About Sustainability
When it comes to Islamic finance and sustainability, there is a unique interplay. Islamic finance principles are derived from Sharia law which places great emphasis on ethics and being socially responsible.
This social responsibility covers everything from wealth generation, wealth distribution, climate change, business, capital receipts, financial services, education, personal and business objectives, and education.
Sustainability in Islam must be viewed through the lens of being Sharia compliant in all dealings throughout life.
Adopting sustainable practices means you are promoting fairness and equality in every aspect of your life.
It has long been known that Islamic finance helps to divert capital into those environmental and social projects that benefit society.
There is growing recognition and support for the moral concepts of Islam and their link to global sustainability and development goals as set out by the United Nations.
Sustainable Development Goals
In 2015, the UN established sustainable development goals with the aim of achieving them by 2030.
These goals have common ground with Islamic finance as they both aim to promote social, economic, and environmental sustainability. In fact, there are several aspects of Islam and Islamic finance that align perfectly with the objectives within the UN's sustainable development goals:
- Zero hunger:
- Alleviation of poverty:
- Improving health and wellbeing
- Education
- Clean and affordable energy
- Industry, innovation and infrastructure
- Gender equality
- Clean water and climate action
- Reducing inequality
- Partnership arrangements
Role Of Islamic Finance In Sustainable Development Goals
Islamic finance is already playing a large role in contributing to the achievement of the UN's sustainable development goals. The foundations of Islam already align with these goals seeking to empower vulnerable communities.
Islamic finance initiatives such as zakat and sadaqa focus on poverty alleviation and working towards zero hunger. Islam promotes good health and wellbeing which is another UN sustainable goal.
Whether it comes to climate action, peace and justice, responsible consumption and sustainable cities, Islam is already ahead of the game.
With its emphasis on sustainable and ethical principles, Islam has been focusing on these kinds of goals for over 1400 years.
WHAT ROLE DOES SUSTAINABILITY PLAY IN ISLAMIC FINANCE?
Sustainability is a key concept in Islam, it therefore follows through that Islamic finance will also include elements of sustainability.
The Islamic finance and industry is well placed to support sustainability and sustainable development goals, whether that is individually or via collaboration.
Islam promotes social inclusion and socially responsible finance decision making. In today's global market where there is a wage labour crisis and worries about economic growth, sustainable Islamic finance is becoming more and more popular.
Research indicates that Islamic finance is one of the most sustainable and leading finance and funding models. Not only does Islamic finance base itself on ethics, it works with human beings to problem solve societal issues.
In the United Kingdom, the Bank of England recognises the significance of Islamic finance and the diversity it offers. Islam encourages inclusion and places great value in equality.
What this means for those using Islamic finance is that greater opportunities are available, and many argue that finance models based on Sharia principles will create ethical and socially responsible foundations.
Sustainability And Ethical Investments
Sustainable Islamic ethical investments are those investments that align with socially responsible and sustainable goals.
This interplay of finance and sustainability leads to positive benefits on an environmental, social and governance practices. Let's have a look at some sustainable and ethical Islamic finance investments:
- Green sukuk: green sukuks are Islamic bonds that invest in environmentally friendly projects. These projects can relate to renewable energy initiatives, climate action and other green policies.
- Islamic microfinance: Islamic microfinance provides financial services to people who may find themselves excluded from mainstream funding options.
Community development initiatives: these initiatives finance projects in agriculture, address the vulnerability in communities, and alleviate poverty.
Leveraging Islamic Finance To Build Sustainability
It is clear that Islamic finance has the potential to play an even greater transformative role in sustainability.
What is needed is for all stakeholders from individuals, governments, countries, and organisations to work together to maximise the impact of Islamic finance.
Some strategies that could achieve the synergy between Islamic finance and sustainable development goals include:
- Partnering with sustainability initiatives
- green sukuks
- sustainable investment vehicles
- support for socially responsible enterprises
- Increase in Islamic microfinance services
- Innovative finance models
- Using zakat for sustainable development
- International collaboration
As the global pandemic fades away and the UK’s economy begins to open up and bounce back, there has never been a better time to take a few minutes and look over your own personal finances.
Money doesn’t grow on trees, but with a solid financial plan you can make your money work for you in 2022 and achieve your financial goals.
The 3 Keys To A Successful Financial Plan
The 3 keys to a successful financial plan
1) Saving vs Investing
The two main ways to grow your financial wealth are through savings and investing; however the returns on these two options are very different.
There are many forms of savings products, ranging from low yield instant access savings accounts (traditionally attached to a current account) to various forms of tax-free incentivized long-term savings products, known as ISAs. While the returns on these savings accounts range from 0.25% to 1.45% the underlying concept is the same. Savings accounts pay out interest on your money because they are using the money to make loans to individuals, businesses and other specialist products like mortgages. Crucially, your money is also protected by the FSCS deposit guarantee scheme, meaning that if the bank goes out of business your money is still safe.
In contrast, investments allow you to earn significantly higher returns because your money is not going via an intermediary - your bank - and you are able to make decisions about how your money is used yourself. For example, the average net returns for investments on Qardus is almost 11% per year. This would mean that you earn £11 for every £100 you invest, compared to £1 with a normal savings account.
2) Risk vs Returns
To best reach your financial goals, it is important to maximize the return on your money while also minimizing risk. Generally speaking, the higher the returns are on any form of savings or investment, the higher the risk. This is the reason the returns on a basic ‘instant access’ savings account are so low - typically between 0.25 and 0.5% - as there are almost no risks due to the FCSC deposit guarantee scheme.
In contrast, investments do not offer these same protections, whether investing on a platform like Qardus, in crypto assets or on the stock market. In each cash the average returns you can earn are significantly higher than with savings, because there is also a risk that the price of Bitcoin can crash overnight, that a company’s stock value may crash or that a business you have invested in via Qardus may be unable to repay it’s facility and you as an investor.
However, these risks are entirely manageable, simply by making sure you diversify your investments across a number of different businesses, so that the losses on any one investment are covered by the returns on your other successful investments. Thinking about these things is the basis of a solid financial plan and why it is so important if you want to increase your wealth during 2022.
3) Realistic and Regular
The final component of a successful financial plan is to have realistic expectations about your goals and the returns you want to achieve over several years. Unlike gambling, a financial plan is about building your wealth over a longer period of time, rather than hoping for an instant windfall. Generally speaking, if something sounds too good to be true it probably is!
Once you have set your financial goals you can build your financial plan to achieve the returns you want. Unlike ‘day trading’ on the stock market, investing on Qardus does not require constant monitoring and tracking of stock prices and the market in order to make solid financial decisions. We do most of the hard work for you by pre-screening businesses to make sure they are real, genuine investment opportunities with minimal levels of risk and great returns available. This means once you decide to invest in a business you can just sit back and let your money (as well as us!) do the work for you while you get on with your life.
However, in order to maximize your wealth and achieve your financial goals it is important that you continue to invest regularly in your portfolio on a monthly basis. Normally the best way to do this is to figure out how much you can afford to invest each month, after you’ve set aside money for your rent, bills and other expenses. This is very similar to what you may already do with your savings account, except the main difference is that when you invest regularly on Qardus, you are able to earn significantly more each month and achieve your financial goals much faster!
Islamic Finance And Money Management
Islamic finance sets out principles for Muslims to follow when it comes to managing their money, investments, and assets. Managing money in a Sharia compliant way is not part of the ethical framework of Islam, but also serves as a guideline for Muslims to follow when transacting and managing finances.
The aim of Islamic finance is to ensure that financial dealings are not speculative, exploitative, or unfair. Instead, the focus is on creating an ethical financial economic system and markets that promote equality, social welfare, and justice within the economy and outside of it.
Every Muslim, business, and industry should follow Islamic finance principles when dealing with money. This is not only a religious requirement, but also an ethical one.
Traditional methods of money management focus on growing wealth and often this is based on interest and speculative investments. Islam is the opposite. It teaches people to manage their money in a reasonable and ethical way.
Islamic Finance - The Holistic Approach
Islam encourages a holistic approach to life. This includes having a wide lens when it comes to financial transactions and wellbeing. When it comes to money, Islam takes a holistic approach that goes far beyond focusing on the economy and markets.
Instead, the Sharia approach aims to emphasize socially responsible, ethical, and spiritual dimensions that align with the wider principles of the faith.
Let's have a look at the aspects of the holistic approach taken by Islamic finance:
- Social responsibility: this is key for Muslims in all aspects of their lives, but especially when it comes to money, payments, economic growth, and activity. The focus is placed on ensuring that people behave in such a manner so as to alleviate poverty and redistribute wealth.
- Ethics: like social responsibility, ethical conduct is a key component of the holistic approach of Islamic finance. Honesty, fairness, and transparency are widely encouraged when it comes to money management. Islam aims to ensure that people and societies as a whole benefit from money (hence the reason interest is strictly prohibited as it is seen as being rooted in the concept of unfairness).
- Intention: the niyyah (intention) behind money management decisions is important for Muslims. The aim is for transactions to be carried out with intentions that focus on ethical conduct and fairness. The idea behind this is that wealth comes from Allah so it should not be used to produce unfairness.
- Consumption and lifestyle: Islamic finance is not simply about how we manage money. Islam requires us to carefully consider our consumption, to avoid over consumption, understand the concept of wealth management, and to behave ethically. Muslims should make mindful and meaningful purchases and not spend frivolously.
- Wealth distribution: an important element of Islam is education and understanding in relation to the principle of sharing wealth. Through the obligations of zakat and charitable paying, Islam places great emphasis on ensuring that wealth passes from the rich to the poor.
- Real economic activity: investments in Islam cannot be speculative or ambiguous. Transactions must be based on a fair agreement with real asset backed and tangible items.
Trends In Islamic Finance
As the landscape of the globe changes with the introduction of digital banking and mobile banking, so too the Islamic finance landscape is changing. More and more people want to save, invest and store money in an ethical way and Islamic finance offers this ethical approach.
Sharia compliant money management offers people with a conscience the opportunity to manage their finances in a way that not only benefits themselves but also those around them.
There is currently an upward trend in the demand for ethical financial services, and Islamic finance is built on ethics and socially responsible finance.
In the UK, The Islamic finance industry is growing fast. This industry not only serves Muslims as individuals and business owners, but also serves Muslims from across the world including the Middle East and other Muslim territories. The Muslim fintech market is growing fast, and research indicates that this will be a key growth area in the coming decade with the fast rise of digital banking.
In addition, the green and sustainable industry is also seeing huge growth. Incorporating Islamic finance with green investment is the perfect alliance as both industries offer each other the perfect ethical partner.
Money Matters In Halal Business Ventures
When it comes to managing finances in business in a Sharia compliant way, it requires more than financial acumen. What is needed is a good understanding of Islamic finance principles. This includes knowing why interest is haram, and how to run your business so it is compliant with Sharia rules.
From opening your business bank account, to making deposits and withdrawals, there are many Islamic finance options available to people. Financial institutions understand the need to cater to those wanting to manage money in a Sharia compliant and ethical way.
Problem Solving Strategies In Islamic Money Management
The starting point is to always ensure that you live a Sharia compliant lifestyle. Whether you are a consumer, customer, business, corporation, or homeowner, there are principles set out to guide you.
Other strategies to help you include:
- Follow the Islamic finance principles when it comes to all and any financial dealings. When in doubt, seek guidance from scholars and financial advisors who are knowledgeable about Islam and Sharia rules.
- Review and adjust accordingly: assess and review your investments and finances regularly and don't assume everything you do is compliant.
- Address debts quickly: it is very easy to take out a loan and fall into debt. Debt that is interest based should be avoided at all costs. Think about the need and value of the purchases you make and do not rely on security that is interest based.
- Zakat: plan and prepare for your zakat payments. This will ensure you are constantly reviewing your finances and preparing for your zakat payments through the year.
- Income: ensure any income generated is halal.
Balancing Money And Morality In Islam
Balancing money and morality in Islam is not difficult. The Islamic finance principles give you a great foundation from which to align your finances with Islam. Make sure you understand these rules and apply them.
The main thing you can do is to avoid interest. It is strictly forbidden. In addition to this, you should prioritise halal earnings and avoid engaging in activities that are deemed to be forbidden.
Fulfilling your zakat obligations is a means through which you can fulfil your rights as a Muslim and share your wealth ethically. Practice disciplined budgets to ensure that your finances do not run away with you and you have the financial security you need through the year.
Always avoid excessive risk and speculation. Be cautious when engaging in any financial dealings that include any element of speculation of gambling.
Instil and teach Islamic values to those around you and ensure that those in your life, whether on a personal or professional level, share your values.
Banking Solutions For Muslims
Look out for banking solutions, products, and services that offer Islamic finance options for Muslims. These days it is not hard to find Sharia compliant bank accounts, mortgage products, loans, and investment options.
There are even Islamic insurance services and wealth management services. So, there is no reason to not do your research and ensure that your money management aligns with the teachings of Islam.
Qardus Ltd do not provide financial or investment advice.
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