Sharia and HMRC

DragonszDen

I had an interesting discussion today with a neighbour who likes to boast about how rich he is. 

A new one on me is a Sharia savings account.  He explained that Sharia accounts pay a profit and not interest which I now understand because of their Sharia laws etc.

Something that confused me was that he said that while Sharia banks do declare profits to HMRC, they don't declare individual accounts just their overall profit. 

He sees this as a bit of a loophole to skip a bit of tax on his savings.  I'm female and he talked down to me a little as though I didn't know what I was talking about

I'll probably never hit the £1000 interest bracket in my lifetime but it got me thinking that if it is true that's one big loophole.

Does anyone know if he is right?  

Thanks in advance everyone.

soulsaver

Yes, he's wrong.

eskbanker

Regardless of exactly how these institutions report, as far as the individual is concerned the returns are treated as if they were interest and so are taxable accordingly, i.e. anyone choosing not to declare them is indulging in fraudulent tax evasion rather than taking advantage of a legitimate avoidance loophole:

https://www.gov.uk/hmrc-internal-manuals/savings-and-investment-manual/saim2250

Or to use a pithy expression posted previously on this subject, Allah won't class it as interest but HMRC will....

https://forums.moneysavingexpert.com/discussion/comment/75688627/#Comment_75688627

seatbeltnoob

for a long time now, interest is not taxed by the bank, you have to self declare your interest earnings via self assessment so you pay tax as per your income tax bracket. before it was a blanket 20%, but now it's down to you to self declare, so it could be 0%, 20%, 40% 45% depending on your income.

Dazed_and_C0nfused

seatbeltnoob said:

for a long time now, interest is not taxed by the bank, you have to self declare your interest earnings via self assessment so you pay tax as per your income tax bracket. before it was a blanket 20%, but now it's down to you to self declare, so it could be 0%, 20%, 40% 45% depending on your income.

You don't need to complete a Self Assessment return due to interest unless it is more than £10,000/year.

For those people not completing Self Assessment returns HMRC automatically issue calculations and tax codes to take account of the interest received, there is no need to self declare.

CKhalvashi

He's completely wrong about the tax situation, but completely correct that Sharia accounts pay an expected profit rate and not interest in order to keep the investment halal. Unlike interest there is no guarantee that this expected profit rate will be an actual rate, although I do have to stress that no UK-based Islamic bank has ever failed to pay the expected profit and some have occasionally beaten it.

Profit is taxed at the marginal tax rate after PSA.

Al Rayan bank, a company I have experience with, show this quite clearly. If he is not declaring the income he owes tax on he may be in for a nasty surprise later. https://www.alrayanbank.co.uk/personal-savings-allowance

The wealthy do not keep an amount beyond working capital in cash, so if he's bragging this is a significant part of his income, he's probably lying to you about his wealth

Zanderman

He's wrong. 

And if he's the same neighbour you mentioned in your other thread he's consistently wrong. (https://forums.moneysavingexpert.com/discussion/6349850/is-currency-reset-conspiracy-theory/p1)

Shedman

Your neighbour reminds me of Harry Enfield's obnoxious character Stanley that was always saying  "I'm Considerably Richer Than Yow" in a brummy accent 😅

barnstar2077

Regardless, he sounds like someone to avoid going forward.  I would head nod when you see him and walk on by!