Mosque or mammon? | Taxation
Mosque or mammon?
27 April 2016
The legal and tax principles that are applicable to observant Muslims when passing their estates to the next generation.
Debts and deductions
East meets west
Shariah is important for Muslims who wish to adhere to Islamic principles.
The Shariah heirship principles are not efficient for inheritance tax purposes.
Lifetime giving is not restricted under Shariah law.
Bequests can be given to a charity registered in the UK (and specified charities abroad) free of tax
A deed of variation can maximise tax efficiency but remain Shariah-compliant.
Shariah is the term used to describe Islamic law, often referred to as God’s law. It plays a fundamental role for Muslims wishing to adhere to the true practice of Islam. Shariah originates from the Quaran (the holy book) and Sunnah, meaning the trodden path of the Prophet Mohammed, blessings and peace be upon him, often evidenced in narrated Hadith – the accounts of his teachings.
Basic succession rules
Shariah law imposes forced heirship principles upon death. This means that at least two-thirds of a deceased Muslim’s estate must be distributed among surviving relatives in fixed shares, as prescribed by theQuaran. The stipulated distribution of the estate is as follows.
A surviving wife is entitled to a one-eighth share
A surviving husband is entitled to a one-quarter share
A surviving mother and father are entitled to a one-sixth share.
The balance passes to children, in so far as a male is entitled to double the share that a female would receive.
On the final point, the reason for the difference in shares between male and female is because men in Islam have a religious duty to maintain their female counterpart. Women have no such reciprocal duty and thus their entitlement under any estate is entirely their own.
Up to one-third of an individual’s estate can be bequeathed to anyone else in a will. This is often referred to as a ‘freely disposable third’ and can encompass gifts to a charity, siblings, nieces and nephews. This freely disposable third cannot increase the shares of a wife, husband, parents, children or anyone else who is entitled to a fixed share in accordance with the Quaran. If a Muslim does not stipulate to whom their freely disposal third should pass, their entire estate will pass in accordance with the rules fixed in the Quaran.
Conflict with intestacy rules
The intestacy rules apply to individuals domiciled in England and Wales who die without a valid will. A husband or wife is entitled to a statutory legacy of £250,000 and personal chattels (irrespective of the value of the estate) and the rest of the estate is divided in two. Half passes to the surviving spouse outright and the balance passes to children outright on turning 18.
If a married individual dies without children, the surviving spouse inherits the entire estate. If an unmarried individual dies without children, the entire estate passes to their parents or their closest blood relatives in a strict order of priority. If an individual dies with no blood relatives the estate passes to the Crown.
The intestacy rules clearly conflict with those of the Shariah and Muslims are encouraged to write a will to dispose of their estates.
Inheritance tax considerations
Inheritance tax is calculated by reference to the value of the assets in the deceased’s estate at the time of death and dispositions made in the previous seven years. This will be payable at the rate of 40% on the value of the estate above the available nil-rate band, currently £325,000.
As is well-known, assets that pass between a husband and wife who are both domiciled in England and Wales are free of inheritance tax, while those that pass to children or parents above the nil-rate band are potentially taxable at 40%. If assets have passed between a husband and wife for tax purposes, the surviving spouse may be able to take advantage of two nil-rate band allowances and therefore pass up to £650,000 free of tax.
The government also proposes an additional ‘main residence’ nil-rate band allowance. Under this, if a family home passes to direct descendants (or step-children) they may be able to take advantage of additional inheritance tax allowances.
A basic Shariah distribution is not necessarily tax-efficient, as shown in Ahmed’s Estate.
If Ahmed’s will had been structured to incorporate a flexible life interest trust (FLIT), in which the wife is entitled to any income of the trust, no inheritance tax would be payable on his death. This is because the assets passing into the FLIT will be treated (but only for inheritance tax purposes) as passing into the wife’s estate. The transfer of assets into the trust will qualify for the inheritance tax spouse exemption as if they had passed to the survivor outright.
Further, the trustees can still make capital distributions to their son in accordance with the Shariah rules as described above and, as long as the entire estate on the death of his wife does not exceed £650,000 or the wife is alive for the next seven years, there would be no inheritance tax to pay.
In these types of wills, it is imperative that the testator appoints the proper individuals as trustees. They should appoint trustees who are financially astute and familiar with the Shariah.
Under a Shariah-compliant will, Muslims can also:
appoint executors (a friend, relative or lawyer) to handle their estate after they have died;
appoint guardians of any minor children;
make provisions for any minor children – say, to invest their inheritance for their maintenance, education or benefit, which could be invested in Shariah-compliant trusts;
specify to whom they would like their ‘up to one-third bequests’ to go;
specify any charities they may wish to benefit; and
specify any funeral wishes. In accordance with the Shariah, Muslims must be buried and their bodies should not be subject to a post mortem examination. These wishes can be inserted into the wills.
Other considerations are discussed under the following sub-headings.
Lifetime planning and equalisations
Under the Shariah there are no restrictions on lifetime giving. Therefore individuals can take the appropriate advice and benefit from the rules and exemptions available under the inheritance tax legislation.
It is essential to obtain bespoke advice at the correct time. For example, gifts made in the seven years before an individual dies may have adverse tax consequences. Further, if gifts are made to individuals or into trusts incorrectly this could mean leave the family with more tax to pay.
Any gifts between spouses are exempt from inheritance tax and these can be made during an individual’s lifetime. These may include severing the joint tenancy of a property held by a husband and wife.
Passing the estate into trust
Trust structures can add security once the circumstances of the family are known after death. For example, a wish can be expressed to maintain minor children or money can be loaned to beneficiaries in a tax-efficient manner.
Further, trusts can be viewed as wealth protection. At the time of a testator’s death, it may be that a son is entitled to more than half the estate. However, depending on the son’s circumstances, such as divorce or bankruptcy, his share could be protected in trust until required.
Business and agricultural property
The value of business interests owned for two or more years is reduced for inheritance tax purposes. There is 100% relief for unincorporated trading businesses, partnerships and unquoted shares in trading companies.
Shares quoted on the alternative investment market (AIM) are unquoted for this purpose. Agricultural property qualifies for either 100% or 50% relief depending on the occupation of the land.
Charitable giving and domicile
Tax-free bequests can be given to a charity registered in the UK (and specified charities abroad), so a one-third share could pass without any liability from a Shariah-compliant will. Further, if 10% of a net estate is gifted to charity the inheritance tax liability will also be reduced.
If a husband or wife is domiciled abroad, this will have UK tax implications and specialist advice should be sought. If an individual’s domicile is in a country that imposes Shariah law, its application to movable assets may override the succession rules of England and Wales.
There are also favourable inheritance tax treatments available to individuals who are domiciled in some countries, such as India and Pakistan, and the issue of domicile should be explored with each Muslim client.
Deeds of variation
If someone has died leaving a will within the past two years, without executing an Islamic will or without executing a tax-efficient one, a ‘deed of variation’ may be executed. This would need to be with the agreement of the beneficiaries of the estate and the terms could be varied to make the dispositions Shariah-compliant and tax-efficient.
Beneficiaries are permitted to voluntarily accept a smaller share of their entitlement to fulfil a testator’s wish after their death. For example, if the main asset in an estate was a family home and the wife was entitled to a one-eighth share, other beneficiaries could waive their share under the Shariah.
In conclusion, advisers with Muslim clients should be aware of the Shariah law issues that may affect them and which might potentially affect their inheritance tax situation.
Heir Hunters show sees fall in Treasury and Crown assets
By Camilla Turner
7:23PM BST 02 Jul 2015
The Heir Hunters television show has seen uncollected wills picked up by the Treasury and the Crown fall by more than half in two years, figures show.
The BBC programme, which follows the progress of probate researchers as they track down missing heirs to unclaimed estates, is thought to have contributed to the value of ownerless assets falling by sixty per cent between 2012 and 2014.
Individuals who died without making a will or having any heirs left estates worth £15.4 million last year, down from £38.5 million in 2012, research by JMW Solicitors shows.
Their findings suggest that further falls were likely in the coming years due to more people opting to make a will.
Under medieval laws, all ownerless assets in England and Wales, which are known as ‘bona vacantia’, either pass to the Treasury on behalf of the Crown or to the duchies of Cornwall and Lancaster if related deaths occurred within their boundaries.
Tasnim Khalid, a senior associate at JMW’s private client department said that bona vacantia is only declared in “exceptionally rare” circumstances, where all possible avenues to find potential heirs have been exhausted.
She added: "However, we have discovered that the sums going to the Treasury and the two duchies each year are still very considerable.
“They are not necessarily made up of big estates but the assets of many individual cases of relatively small value.”
JMW found that income due to the Duchy of Lancaster fell by three-quarters to £842,000 in the space of the two years to last March.
Meanwhile the Duchy of Cornwall’s bona vacantia proceeds fell from £335,000 to £39,000 in just 12 months.
Figures from the Crown Nominee's Account, which is operated by the Treasury Solicitor, show that in two years its share of ownerless estate income had shrunk from £33.514 million to £14.5 million.
Ms Khalid said that she and her colleagues had seen a trebling in the number of wills completed between 2010 and the end of 2014.
However, figures published at the end of last year by the Will Aid campaign indicated that less than half of adults in England and Wales claimed to have made a will.