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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Introduction
Forex trading refers to foreign exchange trading where one currency is traded into another. Forex trading is important in the global markets and economy because it not only facilitates international trade, but is also the biggest financial market globally.
A common question is why does forex matter to the global markets? Not only does forex enable international investment and trade it also leads to financial stability. In order to conduct cross-border and cross-country financial transactions, governments and businesses rely on forex. One example of this is where a European company that is importing goods from the USA is able to exchange euros into dollars.
Central banks use forex to stabilise economies when currencies weaken or inflation increases. Forex ensures that money is able to flow across borders.
To decide whether forex trading is haram or halal depends on the the circumstances of the forex trade. We know that any forex trade that includes interest (riba), gambling (maisir) or uncertainty (gharar) could be deemed to be haram. However, when using interest-free accounts, Islamic forex accounts, and Sharia compliant strategies, forex trading can be done in a halal way.
Key Principles of Islamic Finance
What are some of the key Islamic finance principles to be mindful of when examining forex trading?
The main principles you should know about are:
- Prohibition of riba (interest): any kind of interest element attached to a trade is not permissible under Islamic finance rules. Riba is seen as unjustified financial gain and is haram. In forex trading watch out for overnight interest (swap fees) or interest earnt on sums held overnight.
- Avoidance of gharar (uncertainty): any significant uncertainty could render the forex trade haram. Avoid high-risk and speculative trades especially where traders gamble on price movements that have no real economic value. Similarly, avoid traders who trade without any underlying asset (see below). Uncertainty also applies to contract terms. If a trader has hidden fees or complex conditions then this needs to be challenged.
- Avoidance of maisir (speculation/gambling): Islam prohibits gambling and this also applies to trades where financial gains are linked to luck and unearned income. High-frequency and high-risk trades are best avoided.
- Ethical trading: trades and transactions that happen instantly such as spot forex trades (T+ 0 rule) are better than derivatives and futures that relate to settlements in the future.
The Halal Perspective
Forex trading is considered halal when conducted through Islamic accounts with zero interest. There are Islamic forex traders who adopt ethical practices in line with Islamic finance rules, ensuring adherence to Sharia law. The benefit for Muslims is that they can participate in investing and trading without breaching Islamic rules.
As a simple exchange of currencies, the following conditions can render a forex trade halal:
- Islamic swap-free accounts: these accounts are not interest-based and adhere to Islamic finance principles.
- Clear contracts: ensure you have transparent contract terms and pricing with real market involvement.
- Avoid gambling on price movements and work with experienced knowledgeable traders who understand Islamic finance and who are not single-mindedly focused on the margin or return for the parties.
- spot-trading: focus on actual asset ownership and immediate settlement rather than delayed settlements.
- Make sure your dealings are not gambling, but based on legitimate business trades.
- Day trading vs swing trading: day trading includes buying and selling on the same day. No positions are held overnight therefore the chance of incurring interest fees or swap fees is eliminated. Swing trading involves holding positions for many days at a time and this can include interest fees which are haram.
The Haram Perspective
Conventional forex trading is considered to be haram where there is interest payable/charged, and where there are elements of gambling or uncertainty. Always find out as much information you can about the broker, account, process and industry you are engaging with before starting any trading activity.
There are many Islamic brokers and experts that can help you navigate away from haram practices when it comes to currency trading and markets.
Avoid the following practices
- interest payments.
- hidden fees.
- sudden changes in price.
- manipulations by the brokers
- excessive uncertainty and ambiguity
- swap fees (eg overnight payments)
- exploitation of others in trades
- trades on market movements without understanding the fundamentals of the market
- borrowing large amounts of money/ loan (leverage) which is often linked to riba and increased risk
According to Islamic scholars and the Fiqh Council, conventional forex trading is haram when rooted in traditional trading practices. Conventional trading practices go against Islamic beliefs and values relating to financial activities.
However, forex can be halal if:
- you use transparent traders and brokers with Islamic finance knowledge
- you use Islamic accounts with no interest (swap-free accounts)
- you conduct trades on real economic analysis and foundations
- pick Islamic-compliant brokers and organisations
- you avoid speculation, gambling and deception,
- you focus on immediate settlement and future payments
- your trades are based on real asset ownership
- trade using your own capital and not borrowed sums
Frequently Asked Questions
● Is forex trading a form of gambling?
Unless forex trading takes place within an Islamic finance framework (using Islamic accounts and knowledgeable brokers who understand the religious principles of Islam) then it could be deemed to be gambling. When conducted within Sharia rules, forex can be halal.
● How do Islamic accounts work?
Simple speaking, Islamic forex accounts avoid interest payments and interest rate calculations, and are created specifically to comply with Sharia rules about financial transactions.
● Is leverage allowed in Islam?
Leverage refers to traders borrowing money from other brokers to increase their potential profits. In traditional forex trading accounts leverage often includes interest payments on borrowing. Is Islam, leverage is allowed as long as there is no interest payable on leveraged funds.
● Can I trade forex without interest?
Yes, of course. Islamic forex accounts enable Muslims and ethical investors to trade without receiving or paying any interest. Islamic swap-free accounts were created as a solution for Muslim customers and are available on the market that are tailored to ensure they comply with Islamic finance principles.
Conclusion
Ultimately, whether or not forex trading is halal or haram depends on whether the trade itself complies with Islamic finance principles. Islamic scholars and experts can provide guidance and specify trading practices that are haram to help clarify if trading is halal or haram. However, by choosing Sharia-compliant brokers and accounts and focusing on ethical trading there are many ways of engaging in forex trading in a halal way.
There are obvious red flags to avoid for any Muslim (riba being one of them), but there are ways of ensuring that trades are halal. One of the best things you can do before any kind of financial investment or trade is to seek the advice of Islamic scholars and then speak to Muslim forex traders. These people are best placed to ensure that any trade you undertake is halal and remains compliant.
Remember, even Islamic accounts change over time so you need to ensure that there are proper risk management and risk mitigation strategies in place. Exercise caution, if something looks like it is too good to be true then the onus is on you to dig deeper.
WHAT IS INVESTMENT BANKING?
Investment banking refers to a form of banking that deals with large and complex financial transactions. These transactions include mergers, acquisitions, raising capital funds, and re-organisations of businesses.
Investment bankers work with clients within the world of investment and high finance. Investment banking often deals with raising funds and money for large companies and governments.
Investment banking also involves underwriting debts and securities and brokering trades for private and global investors.
As conventional investment banking includes many interest-based and speculative activities, this has raised the question about the permissibility of investment banking in Islam and if it is haram.
The Concepts Of Halal And Haram Explained
In order to ascertain and evaluate if investment banking is halal or haram, we need to understand the Islamic (Sharia) concepts of halal and haram.In their very basic form, halal and haram mean the following:
- halal - permissible
- haram - impermissible/prohibited
When something is deemed to be halal in Islam, it means that it meets the very specific criteria Islam sets out. Often, the concept of halal is commonly associated with the consumption of food and drink, but in reality for Muslims the concept of halal and haram permeates their daily lives, behaviours, and actions.
For example, drinking alcohol is haram, but so is engaging in dishonest or interest-based financial activities.
WHY IS HALAL AND HARAM IMPORTANT IN ISLAM?
The concepts of halal and haram are important for Muslims as they influence their daily choices, behaviours, and practices.
Let's explore these concepts and understand why they matter to Muslims.
Halal encompasses actions, behaviours, and practices that are permitted and encouraged by Islamic law (Sharia). Halal extends to various aspects of life, including business transactions, financial dealings, accounting, personal conduct, and moral and ethical considerations.
The importance of halal lies in its connection to piety and the pursuit of righteousness. Muslims strive to lead a life in accordance with Allah's commands, and adhering to the concept of halal is a means to attaining spiritual purity and fulfilment.
By consuming halal food, engaging in halal financial transactions, and following halal practices, Muslims aim to align their actions with the principles of Islam and seek the blessings of Allah.
Haram, on the other hand, means "forbidden" or "prohibited." It refers to actions, behaviours, and practices that are explicitly prohibited by Islamic law. Haram activities are considered sinful and spiritually harmful to individuals who engage in them.
Muslims avoid haram practices to maintain their spiritual well-being and to fulfill their duty of obedience to Allah. By refraining from haram actions, Muslims seek to purify their souls, develop self-discipline, and safeguard their relationship with Allah.
The Importance of Halal and Haram for Muslims:
- Morality and ethics: for Muslims, the concepts of halal and haram provide a guide and framework within which to live their lives. This framework is centred on principles of morality and ethics.
- Spiritual Connection: Halal and haram act as guiding principles for Muslims, enabling them to establish a strong spiritual connection with Allah. By adhering to halal and avoiding haram, individuals aim to cultivate righteousness and seek closeness to Allah in their daily lives.
- Personal and self-discipline: Adhering to halal and avoiding haram helps Muslims in their personal development by fostering self-discipline, self-control, and mindfulness. Consciously following the halal path means individuals can enhance their character, strengthen their faith, and develop a sense of accountability.
- Social Cohesion: The concepts of halal and haram contribute to social cohesion within the Muslim community. Shared adherence to these principles promotes unity, mutual respect, and a sense of collective responsibility among Muslims.
Islamic Finance Principles
Islamic finance principles that relate to investment banking are in place to ensure that investment banking activities are Sharia compliant.
Some of the key Islamic finance principles that would govern investment banking trading and activities include the following:
- No riba - one of the main principles to adhere to when looking for halal investment banking is ensuring there is no element of interest involved in the transaction.
- uncertainty - similarly, there should be little to no uncertainty (ghahar) and speculation.
- ambiguity - there should be no ambiguity
- Profit and loss sharing - the parties should share in any profits and losses.
- ethical - the investment activities should be ethical
Principles Of Traditional Investment Banking
Traditional investment banking operates within the framework of conventional financial systems and practices.
These systems are often interest-based. In Islamic the concept of interest (riba) is strictly prohibited. So, investment banking which relies on interest based activities is haram.
Conventional investment banking involves activities such as capital raising, mergers and acquisitions, underwriting securities, and providing financial advisory services.
Traditional investment banks typically engage in interest-based transactions, speculative investments, and may invest in sectors that are considered unethical or haram according to Islamic principles, such as alcohol, gambling, or pork-related industries.
In traditional investment banking, interest (riba) plays a significant role, as it is often earned through loans, debt instruments, and interest-bearing investments and payment options.
Additionally, derivative products, short-selling, and leveraging strategies are commonly employed in traditional investment banking practices. These activities may conflict with Islamic principles that emphasize fairness, transparency, and the avoidance of uncertainty (gharar).
The level of uncertainty and speculation within traditional investment banking can be deemed to be haram.
Sharia Compliant Halal Investment Banking
Halal investment banking, also known as Islamic investment banking or Sharia-compliant investment banking, is a specialised form of financial services that aligns with Islamic principles and guidelines.
Islamic investment banking operates within the framework of Islamic finance. These principles seek to promote ethical and socially responsible financial practices. This means there is less scope for one-sided risk and high levels of speculation. Ultimately, this leads to greater equity and fairness in business dealings.
In halal investment banking, interest-based transactions (riba) are strictly avoided. Instead, Islamic banks and financial institutions offer products and services that are structured in a way that eliminates interest, and instead, focuses on profit-sharing arrangements or partnerships.
For example, instead of charging interest on loans, Islamic banks may engage in profit-sharing agreements, lease-based contracts (Ijarah), or partnership-based arrangements (Mudarabah). What this means for the parties is that there is more fairness.
Furthermore, halal investment banking adheres to ethical investment criteria, avoiding sectors or activities that are deemed haram, such as the porn or alcohol industry.
Investments are directed towards industries that comply with Islamic principles, such as halal food, healthcare, sustainability projects, renewable energy, and ethical real estate.
The concept of risk-sharing is also emphasized in halal investment banking. Islamic financial institutions aim to distribute risks and rewards equitably among parties involved in investment activities. This principle promotes fairness, accountability, and responsible investment practices.
Key Differences Between Traditional And Halal Investment Banking
Overall, the key difference between traditional investment banking and halal investment banking lies in their underlying principles and practices.
Halal investment banking adheres to Islamic guidelines, avoiding interest-based transactions, speculative investments, and unethical industries while emphasizing risk-sharing, profit sharing, ethical investment, and fairness.
By aligning financial activities with Islamic principles, halal investment banking seeks to cater to the specific needs and values of Muslim investors.
Muslims And Investment Banking
Islamic investment banking is a growing industry. In the United Kingdom, there are many banks and financial institutions that offer halal investment banking opportunities, products and services.
For students who are currently studying economics and finance subjects, there are opportunities to seek employment and a career in Islamic investment banking firms.
However, it is important to make sure that you work with investment bankers who are familiar with the concepts of Islamic finance and halal and haram. They will guide you to investment banking services and options that are deemed to be halal under Islamic finance rules.
Qardus Limited does not give financial or investment advice.
WHAT IS QARD AL-HASSAN?
Qard al-hassan, also known as qard al-hasan, is an Islamic finance term that essentially refers to a loan that is interest free. Typically in a transaction that includes qard al-hassan, the borrower will repay the amount owing under the principal amount without any other mark up or interest payment being charged. Qard al-hassan financial products are compliant with Sharia rules that dictate that interest (riba) payments are not permissible, whether the interest is being paid or being charged.
These types of loans offer financial solutions for Muslims looking to borrow funds that do not include any interest payments.
Qard al-hassan loans are loans that are provided to help others. The word hassan itself means acceptable or good (of good faith). Islamic banking services are now offering qard al-hassan loans for both Muslims and non-Muslims.
Qard Al-Hassan Loans
In Islam and Islamic banking, Qard al-hasan loans do not have an interest rate element, and this means that businesses and consumers are able to borrow money on a goodwill basis. Generally speaking, qard al-hasan loans tend to be used for welfare purposes. The Quran stipulates that Muslims should endeavour to provide these types of benevolent loans where possible and to those who need these kinds of services.
"Establish regular prayer and give regular charity and give Allah Qard Hassan" (Quran 73:20)
The principle of qard al-hassan in Islam enables Muslims to further the social justice ethos that underpins Islamic finance. Islamic finance facilitates loans from those with the funds to those who need financial assistance without breaching Sharia rules. Qard al-hassan can be viewed as a loan agreement that is akin to giving charity. The borrower and lender sign an agreement confirming the terms of the qard.
HOW DOES QARD AL-HASSAN WORK?
In Islam, qard al-hassan works in the following way. A lender will lend a business or service an amount of money that they need (usually for social justice purposes). The principal amount borrowed will be interest-free. The borrower will then repay the amount of money borrowed without any interest or surplus payments owing. Borrowers are permitted to pay an additional amount back to the lender as a gesture of goodwill, but this cannot be done based on any promise or commitment.
Qard al-hassan loans do not increase over time or accumulate any interest charges like traditional loans do. This means they offer problem solving solutions for Muslims.
The most important element of Islamic qard al-hasan loans is that they are untouched by any form of riba. There should not be any reference or link to the economic market conditions and fluctuations, and the lender cannot ask for the return of the loan before the contractual repayment period ends.
Qard Al-Hassan - The Redistribution Of Wealth
Islamic finance systems focus on socio-economic justice and the enhanced wellbeing of society, especially the alleviation of poverty. Alongside sadaqa and zakat, qard al-hassan is an essential Islamic finance instrument of redistribution of wealth.
Qard al-hassan minimises the cost of borrowing and remains compliant with Islamic Sharia law.
Social Justice, Qard And The Islamic Finance Economic System
The Islamic finance economic system has always centred on principles of social justice (as mirrored throughout the practices and teachings of Islam). The focus of the finance system is to ensure and improve the overall wellbeing of society and using money to enhance social conditions.
Qard al-hassan is a key concept that acts as a crucial redistributive instrument. The distribution of funds from the rich to the poor aims to reinforce social unity and cooperation. As the global experience of, and appetite for, ethical finance options and factor analysis continues to grow, qard al-hassan is fast emerging as an important tool in the fight against poverty and the drive to ensure there is more financial freedom and equity for poorer communities.
As more and more Islamic finance companies and banks are offering innovative qard al-hassan products and financial services, project management for those customers and business operations working within the social justice sector will become easier and more accessible. Qard al-hassan services will start to become more readily available in banking and private sector financial industries.
The opinion of scholars is that qard al-hassan loans are problem solving as they facilitate the redistribution of funds that are compliant with ethical and Islamic finance principles. Islamic finance is facilitating financial freedom and investment options for those who have historically been excluded from traditional financial markets and industries that did not cater to their religious requirements.
According to Sharia law, qard al-hassan loans are deemed to be acts of good faith, and loans that help those in need. Advancement of news relating to qard products and websites, and information technology means that qard al-hassan financial services are more readily available and searched for online, especially in Middle Eastern territories. This has enhanced the supply and demand of qard services. Historically, qard al-hassan loans have proved to be effective for economic growth, enhancing employment, and alleviating poverty.
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