REV BN 08: Alternative Finance Arrangements

Who is likely to be affected?

1. Individuals and companies who wish to invest or borrow money under arrangements that do not involve the receipt or payment of interest.

2. Individuals who wish to use such arrangements for the purchase of property.

3. Banks and building societies who wish to offer alternative finance products and who will have to apply the rules for deduction of tax at source.

General description of the measure

4. This measure will ensure that certain financial arrangements that replicate the effect of investments or loans at interest are taxed no more or less favourably than equivalent arrangements which do give rise to interest.

5. The changes to the Stamp Duty Land Tax (SDLT) regime will extend the reliefs introduced in Finance Act 2003 to a wider range of alternative property finance arrangements.

6. The change will facilitate the use of alternative financial products including for example those developed to be Shari’a compliant.

Operative date

7. The changes relating to borrowing and investing will apply to arrangements entered into on or after 6 April 2005.

8. The changes to the SDLT regime will apply from Royal Assent to the Finance Bill.

Current law and proposed revisions

9. Current tax law contains no specific rules to deal with finance arrangements that are structured so that they do not involve the payment or receipt of interest. This can lead to problems such as the return on an investment being characterised as a distribution for tax purposes.

10. The exception to this is alternative property finance, where sections 72 and 73 Finance Act 2003 offer relief on additional payments of SDLT for alternative property finance structures that involve more than one transaction for SDLT purposes.

11. The new provision will provide a level playing field for tax between equivalent financial products whether or not these involve the payment or receipt of interest. This will include application of the rules for deduction of tax at source.

12. The changes to alternative property finance arrangements will allow a wider range of property finance structures to have relief from more than one SDLT charge and will make section 72 relief more easily available in Scotland.

Further advice

13. If you have any questions about these changes, please contact Chris Kerr on 020 7147 2619. For changes concerning alternative property finance please contact Adam McMordie on 020 7147 2798. Information about Budget measures is available on the Inland Revenue website

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