Sharia Savings Accounts

Tom_Bradbury

Sharia accounts don't pay interest, but pay profits which increases the capital sum.  Why are they therefore taxed as savings interest and not as capital gains, which would therefore benefit from a much higher allowance before they are taxed.

Dazed_and_C0nfused

Tom_Bradbury said:

Sharia accounts don't pay interest, but pay profits which increases the capital sum.  Why are they therefore taxed as savings interest and not as capital gains, which would therefore benefit from a much higher allowance before they are taxed.

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

You've got your figures the wrong way round.

For most people their total taxable income has to be £18,570 before any tax is payable on interest.

About 50% more than the Capital Gains exempt amount.

EthicsGradient

Because calling it "profit" is a legalistic move that's OK for religion, but doesn't convince HMRC. And I'm with HMRC on this. The profit is limited - Sharia firms do not pay out excess 'profits' if things turn out better than expected, which a real 'profit' (or capital gain) would involve. By limiting the upside, they are able to limit the downside, and so have hardly ever paid out less than 'expected'. It's more dependable than dividends from shareholdings, and the dividends are taxed as income, not capital gain (admittedly at a different rate).

Sensory

Banks make their profits in numerous ways, and are then able to offer a fraction of these profits to attract savings deposits. Regardless of how a financial institution generates its own profits, you receive income calculated solely on the daily cash balance of your account. Whether this income is classified as 'interest' or 'profits' is irrelevant for tax purposes, because the underlying mechanism is practically the same.

phillw

Tom_Bradbury said:

Sharia accounts don't pay interest, but pay profits which increases the capital sum.  Why are they therefore taxed as savings interest and not as capital gains, which would therefore benefit from a much higher allowance before they are taxed.

As far as the saver (and HMRC) is concerned, they are the same. As far as the bank and the borrower are concerned, they are quite different.

https://www.maybank.com/iwov-resources/pdf/islamic/learning-centre/islamic-banking-profit-vs-interest.pdf

tifo

It's not only the one religion which prohibits interest (usury), the Torah and Bible do too, from what i've read.