Islamic Bank of Britain a safe bet?

loofer

Now I would have thought it was just as much intertwined with the rest of the banks but this news story has put my worries to rest a little

http://news.bbc.co.uk/1/hi/uk/7677181.stm

I've been with the bank a little over 6 months now, though I still use Halifax as my main bank (for salary/DDs/cash withdrawals etc).

IBB is just like any other professional high street retail bank except in it's dealings. Obviously it doesn't match any of the major bank's branch infrastucture and they don't offer Faster Payments yet which is why I haven't moved my slaary credit and DDs across from Halifax yet (My nearest IBB branch is about 15 miles away).

The rates of return aren't as competitive as conventional banks but I'm satisfied with that.

I recently opened there Treasury Deposit Account. It's a fixed term deposit. There's two versions of it.

The agreement I've got is where you deposit a set amount (£50k minimum) for a set period (minimum 6 months). They use the funds to purchase a commodity on your behalf by acting as an agent. At the time of the agreement, they agree to purchase the commodity back of you at the date of maturity at a higher amount.

Here's what I got for my agreement.
Initial investment: £60k
Commodity: 500 Troy ounces of Palladium
Term of agreement: 186 days
Return on Maturity: £61,482.90

The amount is paid Gross, so you're responsible for paying the income tax. It's classed as Savings rather than investment so it's covered by the FSCS.

The equivalent Profit Rate is 4.85% for the above amount/period. It varies depending on the terms, e.g. if I requested a term of 9 months the rate would have been annual equivalent of 4.95%.

The interesting thing is you actualy own the commodity and can request delivery inspection of it apparently (for a reasonable fee).

thrupence

So you pay CGT at 18% and you get up to £9000 odds tax free/

Hmmmm. Interesting.

sabretoothtigger

http://www.diamondvues.com/2007/01/what_is_palladium.html



I'd prefer if it was classed as CGT because alot of people dont use their tax free allowance, would be usefull for higher tax payers

LongTermLurker

thrupence wrote: »

So you pay CGT at 18% and you get up to £9000 odds tax free/

Hmmmm. Interesting.

No, because it's classed as savings, not an investment, so OP says you pay INCOME tax, not CGT.

I believe the reasoning behind the account is because it's not acceptable to pay or charge interest under Islamic law, so rather than pay you interest on your savings, the bank presumably has to give you something in return for your money (the palladium). The agreement to buy it back at a loss is a way to make it beneficial to the customer without the customer actually having charged the bank interest.

Now I would have thought it was just as much intertwined with the rest of the banks but this news story has put my worries to rest a little

I can't see an Islamic bank tying itself up in American products and debt, to be honest.

loofer

thrupence wrote: »

So you pay CGT at 18% and you get up to £9000 odds tax free/

Hmmmm. Interesting.

I didn't get that bit... but I shall assume you mean it's a bit like profit from a business i.e buying asset then selling it for a gain.

Techinically it is I suppose.

I wasn't advised either way about tax implications. My wife doesn't work so I'll be using her £6K personal allowance anyway.

Yup, you're quite right about the bank not paying/recieving usury(interest). They've managed to fit this form of lending into the existing British legal system, though I believe the legal framework was adapted a little to accommodate this.

Interest wasn't allowed in this country under Christian Law until one of the Monarchs (King Henry I think) abolished the law. They got round it using contractus trinius or something (google it lol).

Secondly, money can't be invested in illegal or immoral things such as drugs/alcohol/sex industry etc. In addition it can't be invested in companies that operate based on paying and recieving interest... so you maybe right about why they may not be so entangled in the financial mess of the States.

They have to borrow funds from somewhere like most banks get it from each other so I thought that might have posed a bit of a problem.

Well the minimum LTV has always been 80% I believe. They also have the Bank of Qatar (I think) as a major shareholder.

I previously always had my savings in HBOS but instructed them not to pay me any interest (which they were more than happy to do so)

sabretoothtigger

I know muslims cannot get normal mortgages so by virtue of their religion they've been saved from all this, that must be satisfying after missing out on deals all this time.

For some reason banks like Santander didnt involve themselves either but now are buying up all the fallen over banks.
HSBC had limited exposure though some say otherwise and LLoyds was called boring in its stance but now is proved right though they upto their elbows with the hbos deal (hbos is bigger then them afaik)

Ive read standard chartered shares are a bargain, they arent involved with sub prime debt but have halved in price anyway

thrupence

LongTermLurker wrote: »

No, because it's classed as savings, not an investment, so OP says you pay INCOME tax, not CGT.

Yes, I can see now that the OP says explicitly that it's classed as savings rather than investment, so you pay IT rather than CGT.

But it looks much closer to a commodity purchase and sale, so it's a bit naughty of the authorities to class it as savings.thereby denying us the opportunity to avail of CGT allowance.

The brilliant thing about it is that the transaction doesn't lead to a massive increase in the money supply, encouraging rampant consumerism and boomy/bust etc; precisely the situation we find ourselves in at the moment.

LongTermLurker

thrupence wrote: »

Yes, I can see now that the OP says explicitly that it's classed as savings rather than investment, so you pay IT rather than CGT.

But it looks much closer to a commodity purchase and sale, so it's a bit naughty of the authorities to class it as savings.thereby denying us the opportunity to avail of CGT allowance.

Personally, I'd agree - we all have this £9000 and odd CGT allowance but most people don't get the opportunity to utilise it. My take on it is that CGT is applicable if there is a gain, in other words if the product increases in value, as opposed to generating more money which would be income. In that respect, the fact that you buy at one price and sell at another does suggest a gain...

Do we have any muslims on here with experience of how this kind of thing is taxed? If it is through CGT, then the rates could be seen as being tax free up to £9300 of "non-interest" and only taxed at 18% after that.

LongTermLurker

http://www.islamic-bank.com/islamicbanklive/DSaveProfitsRates/1/Home/1/Home.jsp

Clearly income tax :mad:

The profit share paid by Islamic banks is governed by specific tax legislation contained in the Finance Act 2005. This legislation provides that your profit share will be paid after the deduction of tax at the applicable rate. We will issue you with details of the amount of profit share and the tax withheld each tax year.

If you pay tax at the higher rate (currently 40%) you can generally offset the withholding tax against your overall liability to tax and you will therefore generally be liable to additional tax of 20% on the total amount of the profit share (that is, before the withholding).

Under existing UK law, starting and basic rate tax payers have no further liability to UK tax. If you are eligible, you may receive your profit share gross, i.e. without deduction of tax, provided an Inland Revenue form R85 has been completed, signed by you and returned to us.

Expected "profit" on a term deposit is 4.5% - take off 20% BR tax and you get a return of 3.6%, and for a 40% taxpayer it would be down to 2.7% return.

I would say, unless your religion or morals require an account like this, the return is so far below the level of inflation as to not be worthwhile. You can get the same safety with better return in NS&I.

Bromley86

But it looks much closer to a commodity purchase and sale

But it's not a commodity purchase and sale. That's just the fluff to allow people to feel they can do it without messing with their religion.

If the prices of palladium fell to zero, the bank would still buy it back at £x. Without knowing anything about it, I'd have thought HMR&C would treat all such contracts as income as there's no risk.

Check out the dancing around that occurs to get a mortgage. You pay "rent" rather than interest, but that "rent" is BoE base rate plus 1.95%.
http://www.islamic-bank.com/islamicbanklive/HomeFinance/1/Home/1/Home.jsp

loofer

Bromley86 wrote: »

But it's not a commodity purchase and sale. That's just the fluff to allow people to feel they can do it without messing with their religion.

If the prices of palladium fell to zero, the bank would still buy it back at £x. Without knowing anything about it, I'd have thought HMR&C would treat all such contracts as income as there's no risk.

Check out the dancing around that occurs to get a mortgage. You pay "rent" rather than interest, but that "rent" is BoE base rate plus 1.95%.
http://www.islamic-bank.com/islamicbanklive/HomeFinance/1/Home/1/Home.jsp

you're quite right.

In effect they replace the words interest with profit along with dictating where the money is invested. That's all it is really.

In it's simplest form, the Islamic stance is, you shouldn't make money from money. Money is just a medium of exchange. Money should be made from goods/services (though you may argue that providing credit is a service).

Well who cares, it makes me feel better that I believe I am doing something that is consistent with my faith and also making my money work for me.

The quote about Income Tax above is for the Direct Savings account, which is like a Web Saver. Not the same as Treasury Account I opened (Muradaba)

With regards the CGT/IT debate. I wasn't told specifically weather CGT or IT applied to the profit.

I asked if it was savings or investment for the purposes of FSCS. They said it was savings so I assumed that = income tax