The UK has a diverse population with many religious and cultural communities living together in harmony. It makes it one of the most alluring places to live in the world.
The Office for National Statistics report outlined that there were just over 3.3 million Muslims living in the UK as of August 2018. It is believed that only 40% of the whole adult population have a Will. So we can assume that many Muslims do not have a valid Will in place.
It is the duty of a Muslim who has anything to bequeath not to let two nights pass without including it in his Will. Sahih al-Bukhari.
If you die without a Will in the UK, then your assets are distributed according to intestacy. These rules outline fixed shares to specific people based on who is living at the time of your death. If you are married with two children then first £250,000 of the estate goes to your spouse (plus all your house possessions; known as chattels). The remainder is split 50% to your surviving spouse and the rest in equal shares to your children.
These rules do not reflect the shares outlined in the Quran. In order to make sure that the distributions are made according to Shariah, the beneficiaries would have to vary their amount, something they may not want to do. Otherwise, you need to make a Will.
Tax Problem with Islamic Wills
If a Muslim has decided to make an Islamic Will and distribute according to Shariah then they may cause an immediate tax problem. The most utilised tax exemption in the UK is the Spousal Exemption. Anything passed between a husband and wife is exempt from Inheritance Tax.
With non-Muslim couples they utilise the exemption because they usually pass everything to each other when the first person dies. Whereas, with Muslims, a maximum of 1/8th of the estate would go to a surviving wife and 1/4th would go to a surviving husband. That means the majority of the estate is not covered by the spousal exemption and liable to Inheritance Tax at 40%.
Each person has an allowance before they pay Inheritance Tax. This is known as the Nil Rate Band. Set currently at £325,000. There is an additional band of £150,000; the Residential Nil Rate Band. This band can only be applied to assets going to direct descendants, the asset must be a primary residence and the allowance is only available if the estate is of a certain size.
So if they are able to access both bands then they potentially have an allowance of £475,000 before paying tax. However, if they are over that amount then that portion of the estate is taxable at 40%.
Why is this an issue?
Majority of the older UK population are property rich and cash poor. Many Muslim couples have assets in the sole name of one of the couple, usually the husband. That with the average age that women live in relation to men means a widowed woman may find herself needing to sell properties to pay a tax bill due within six months of date of death. Something most non-Muslim couples would not have a problem with.
This all because they have done a simple Will with Islamic distribution.
Another consideration is that the Islamic Nikah needs to be formalised under English law to access the tax exemption. As it is only available to those legally married. If you have had a Nikah abroad and your marriage is recognised there then may be legally married here too. Best to get advice.
What can be done?
The use of an immediate post death interest trust over the estate would solve the immediate tax consequences of the Islamic distribution. This works by giving an interest over the estate to the surviving spouse but that the ultimate distribution is to go according to Shariah once the life tenant (the surviving spouse) either passes away or gives their interest away. Therefore, it remains an Islamic distribution, so compliant but also the estate qualifies for the Spousal Exemption and survivor gets all the transferable elements of the deceased’s Nil Rate Band allowance. Although this may seem simple, it is not.
If you are thinking of getting an Islamic Will, please get advice first. You may be causing adverse issues for your relatives.