Anomaly in legislation closed for investors

Stamp duty avoidance rules tightened

A loophole allowing commercial property investors to avoid paying stamp duty on an estimated £1bn of deals was closed in the chancellor Alistair Darlings maiden Budget.

Rules on office sales using Islamic financing, structured to avoid paying interest in line with strict religious laws, were tightened as a growing number of investors escaped stamp duty by taking advantage of an anomaly in legislation.

In a Sharia-compliant property deal, the bank buys the property from the seller, rather than simply providing finance for the buyer to own the property directly.

The person buying the property rents it back from the bank, eventually buying the property from the bank for a pre-arranged price higher than the original sale. This is similar to paying a conventional mortgage, except rent is paid rather than interest, therefore complying with the Koran.

Commercial property investors were able to exploit changes to the stamp duty regime in 2005, which were designed to end the anomaly of homeowners who used this form of finance from paying stamp duty twice.