Alternative finance investment bonds - Sukuk
With effect from Finance Act 2009 a new stamp duty land tax (SDLT) relief will be introduced for transactions involved in connection with the issuance of sukuk. A sukuk is an Islamic financial certificate, equivalent to a bond that complies with the requirements of Sharia'a Islamic law. The relief is intended to enable sukuk to be held, issued and traded without incurring SDLT costs over and above that which would be incurred in connection with similar dealings in traditional corporate bonds.
Under draft legislation published for consultation in the run-up to the Budget, in broad terms the relief will apply where land is transferred by one person to a bond-issuer ("the first transaction") to be held by the latter for the purpose of the issuance of a bond until the termination of the bond (no later than 10 years) at which time ownership of the land reverts back ("the second transaction"), and, for the purpose of generating income or gains for the bond, the bond-issuer and the original owner enter into a leaseback agreement. The first and second transactions are to be relieved subject to satisfying six conditions. A pre-existing SDLT relief for sale and leaseback arrangements is intended to provide a complete exemption for the acquisition of the leaseback.
Transactions involved in connection with the issuance of sukuk are unlikely to suffer any more tax than equivalent transactions currently undertaken in the market. However, the principle of relieving the first transaction may place sukuk transactions at an economic advantage compared to issuances of normal asset-based securities. In particular, an equivalent method to achieve securitisation of rental income in the current market, involving a sale and leaseback transaction entered into with a bond-issuer, usually attracts SDLT on the sale element of the transaction, which, subject to satisfying conditions, shall be relieved under sukuk. Although for completeness mortgage securitisations do not usually give rise to an SDLT cost because security interests are exempt interests for SDLT purposes.
So far as the detail of the draft legislation is concerned, the relief is able to be clawed back in circumstances that are outside the bond-issuer's control, e.g. insolvency of the original land-owner. It would be fairer, we think, for no clawback to arise if the first and second transactions are involved in connection with arrangements for the conditions to be satisfied. Alternatively, carve-outs could be inserted to deal with the benign types of situation in which the conditions are not met by reason of events outside bond-issuer's control.
