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Tax questions raised as Sharia couple separate

A London Tax Discussion Group recently considered the separation of a Muslim couple, who entered a Sharia marriage, that raises important questions over tax exemptions for married couples.

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Andrew McKenzie-Smart

August 2019

The accountant explained that Asif had entered into a Sharia marriage some years ago with Fariah in a UK mosque. They did not register the marriage with the local registrar. Hence, his solicitors have confirmed that Asif has never been legally married in the UK to Fariah.

Asif moved out of the family home in the tax year ended 5 April 2019, leaving his children with Fariah in the family home and ceased to operate a business via “Asif Ltd”. Asif has 55% of Asif Ltd with Fariah owning the remainder of it.

It is beyond the scope of this article to discuss the tax implications of their separation on the former matrimonial home, but the following points were discussed in the Tax Discussion Group:

Sharia Marriage and the Taxes Acts

The first area concerned whether their Muslim marriage ceremony is sufficient for them to be able to benefit from the UK spouse tax exemptions available. Checking the Taxes Acts, there appeared to be no definition regarding what would be considered to be an eligible marriage defined therein.

However, guidance in this area appeared to indicate that whether the marriage was eligible to benefit from the various tax relief and restrictions for spouses would be depend entirely on whether the marriage was legally recognised in the jurisdiction it was entered into. In this case it was not recognised under UK law and hence it appeared that Asif and Fariah were a co-habiting couple for tax purposes.

Rights to the Company

The cessation of Asif Ltd was also considered. It was felt that as Asif had begun to operate via a new limited company, “Asif Two Ltd”, he would be subject to income tax on the monies he received. 

There were differences of opinion regarding the monies Fariah received from the company. Some felt that she was insufficiently involved in the company and that the “settlements legislation” should be applied. Others thought she would need to declare the distributions received as income dividends, whereas others thought it should be treated as capital. This was on the basis that Fariah was an unconnected party who would no longer be involved in the industry after the receipt of the monies. 

It was agreed that the settlement between them needed to identify the underlying nature of the monies that were being transferred or split between the various components.

Each month (with the exception of July and August) the Tax Discussion Groups in Croydon and South East London meet to discuss client tax issues on a no-names basis. These meetings are free to attend & normally cover over a dozen tax issues raised by those attending.

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