SDLT and Islamic home finance

Q: Which relief applies to which structure?

StructureStatutory reliefWhat is relieved Bank buys and leases to customer (Ijara, Diminishing Musharaka)FA 2003 s71AThe lease to the customer, any staged transfers of shares, and the final transfer of the reversion Bank buys and resells to customer, who grants a legal mortgage (Murabaha)FA 2003 s73The resale from the bank to the customer Section 71A applies where the bank buys a major interest, or an undivided share of one held on trust for the bank and the customer as beneficial tenants in common, grants the customer a lease or sublease out of it, and agrees that the customer can require the bank to transfer the whole interest to them in one transaction or a series. Section 73 applies where the bank buys a major interest, sells it to the customer, and the customer grants the bank a legal mortgage over it. A "financial institution" takes its meaning from section 564B of the Income Tax Act 2007 (section 73BA). Since the Finance Act 2015, firms with FCA permission to enter into regulated home purchase plans as home purchase provider are also included for section 71A.

Q: How much would a typical purchase cost?

Illustration only. Amira buys a £400,000 house in England in 2026 to 2027 using an Ijara plan. She owns no other property but has owned one before, so standard residential rates apply: nothing on the first £125,000, 2% on the next £125,000 (£2,500) and 5% on the remaining £150,000 (£7,500), giving £10,000. That is charged once, on the bank's purchase. The lease to Amira and the eventual transfer of the reversion are exempt under section 71A, so the total is the same £10,000 she would pay with a conventional mortgage. If Amira had been a first time buyer, the customer is treated as the purchaser for the relief, so the rates would be nil on the first £300,000 and 5% on the remaining £100,000, giving £5,000. The relief is not available if the price is over £500,000.

Q: What can cause the relief to fail?

The bank's interest leaves the arrangement. HMRC says at SDLTM28140 that relief is not due if the institution transfers the property to a third party outside the arrangement, or if the property was not held by a financial institution throughout. The customer stops holding the lease. The section 71A(4) condition requires the customer to hold the lease at all times between the lease and each further transfer. Control of the institution. Section 73AB switches off section 71A if the arrangements, or connected arrangements, include a person acquiring control of the financial institution. Interaction with other reliefs. Section 73A says sections 71A to 73 do not apply where the first transaction is exempt under Schedule 7 (group, reconstruction and acquisition relief). Avoidance. In an opinion dated 27 July 2022, published by HMRC, the GAAR Advisory Panel concluded that SDLT arrangements on a residential sale involving an alternative finance agreement and a lease were not a reasonable course of action.

Islamic home finance usually works by the bank buying the property and then leasing or selling it on to the customer, which without relief would mean SDLT being charged more than once. Sections 71A and 73 of the Finance Act 2003 exempt the later steps, so that if the conditions are met SDLT is paid once, on the purchase price, just as it would be with a conventional mortgage.

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Why would Islamic home finance be taxed twice without relief?

Home purchase plans that avoid interest are built from ordinary property transactions. HM Land Registry’s Practice Guide 69 describes the three main forms used in England and Wales:

Ijara wa Iqtina. The bank buys the property the customer has chosen, grants the customer a lease, and undertakes to transfer the reversion to the customer at the end of the term. Monthly payments combine rent with an amount set aside towards the final purchase.
Diminishing Musharaka. The bank and the customer contribute to the price and hold the property on trust in shares. The customer leases the property, pays rent for the bank’s share, and buys that share in stages until the whole title is transferred to them.
Murabaha. The bank buys the property and sells it straight on to the customer at an agreed higher price payable over time. HMRC’s Corporate Finance Manual (CFM11130) describes murabaha in the same terms: the finance provider buys an asset and resells it at a pre agreed higher price.

In each case there is a purchase by the bank followed by a lease, a sale or a series of transfers to the customer. Each of those is a separate transaction for SDLT, so without a specific relief the customer would bear SDLT on the bank’s purchase and again on the later steps. HMRC’s Stamp Duty Land Tax Manual at SDLTM28005 says the reliefs exist so that the SDLT payable is in line with what would be payable on a purchase using a conventional mortgage.

Which relief applies to which structure?

Structure	Statutory relief	What is relieved
Bank buys and leases to customer (Ijara, Diminishing Musharaka)	FA 2003 s71A	The lease to the customer, any staged transfers of shares, and the final transfer of the reversion
Bank buys and resells to customer, who grants a legal mortgage (Murabaha)	FA 2003 s73	The resale from the bank to the customer

Section 71A applies where the bank buys a major interest, or an undivided share of one held on trust for the bank and the customer as beneficial tenants in common, grants the customer a lease or sublease out of it, and agrees that the customer can require the bank to transfer the whole interest to them in one transaction or a series. Section 73 applies where the bank buys a major interest, sells it to the customer, and the customer grants the bank a legal mortgage over it.

A “financial institution” takes its meaning from section 564B of the Income Tax Act 2007 (section 73BA). Since the Finance Act 2015, firms with FCA permission to enter into regulated home purchase plans as home purchase provider are also included for section 71A.

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Who pays SDLT, and on what?

The bank’s purchase from the seller, the “first transaction”, is charged in the normal way on the price. The relief then works step by step:

Under section 71A(3), the lease to the customer is exempt if the provisions relating to the first transaction are complied with, including payment of the tax.
Under section 71A(4), each later transfer to the customer is exempt if the first two steps were dealt with properly and, throughout, the bank kept the interest not yet transferred and the customer kept the lease.
Under section 73(3), the resale is exempt only if the bank paid tax on chargeable consideration of not less than market value.

The customer, not the bank, is treated as the purchaser of the first transaction for the higher rates on additional dwellings (FA 2003 Sch 4ZA para 15) and for first time buyers’ relief (Sch 6ZA para 3). So the bank’s ownership of other houses does not trigger the surcharge, but the customer’s ownership of another dwelling can. Someone who has previously been the customer under such an arrangement for a dwelling is not a first time buyer (Sch 6ZA para 6(1)(c)). See SDLT higher rates for additional dwellings and first time buyers’ relief.

How much would a typical purchase cost?

Illustration only. Amira buys a £400,000 house in England in 2026 to 2027 using an Ijara plan. She owns no other property but has owned one before, so standard residential rates apply: nothing on the first £125,000, 2% on the next £125,000 (£2,500) and 5% on the remaining £150,000 (£7,500), giving £10,000. That is charged once, on the bank’s purchase. The lease to Amira and the eventual transfer of the reversion are exempt under section 71A, so the total is the same £10,000 she would pay with a conventional mortgage.

If Amira had been a first time buyer, the customer is treated as the purchaser for the relief, so the rates would be nil on the first £300,000 and 5% on the remaining £100,000, giving £5,000. The relief is not available if the price is over £500,000.

Does the relief cover refinancing or switching providers?

Yes. The bank’s purchase is itself exempt if the seller is the customer, or another financial institution that acquired the property under arrangements of the same kind with that customer (sections 71A(2) and 73(2)). HMRC explains at SDLTM28120 that this lets a customer raise finance against a home they already own, set up a new arrangement with their existing provider, or move to a different provider, matching the treatment of a conventional remortgage.

What can cause the relief to fail?

The bank’s interest leaves the arrangement. HMRC says at SDLTM28140 that relief is not due if the institution transfers the property to a third party outside the arrangement, or if the property was not held by a financial institution throughout.
The customer stops holding the lease. The section 71A(4) condition requires the customer to hold the lease at all times between the lease and each further transfer.
Control of the institution. Section 73AB switches off section 71A if the arrangements, or connected arrangements, include a person acquiring control of the financial institution.
Interaction with other reliefs. Section 73A says sections 71A to 73 do not apply where the first transaction is exempt under Schedule 7 (group, reconstruction and acquisition relief).
Avoidance. In an opinion dated 27 July 2022, published by HMRC, the GAAR Advisory Panel concluded that SDLT arrangements on a residential sale involving an alternative finance agreement and a lease were not a reasonable course of action.

Which SDLT returns have to be filed?

SDLTM28005 says that where relief is claimed, a return must be completed claiming it and showing the chargeable consideration as the price agreed between the parties. The relief code for alternative property finance in HMRC’s SDLT1 guidance is 24. HM Land Registry’s Practice Guide 69 notes that both the transfer to the bank and the lease to the customer are potentially notifiable, and that the final transfer to the customer is also potentially notifiable.

Not every step needs its own return. The bank’s interest is an “exempt interest” under section 73B, so dealings in it are generally not notifiable, and section 71A(7) provides that a staged transfer exempt under section 71A(4) is notifiable only if it transfers the whole of the bank’s remaining interest. In practice that means a return for the purchase, a return for the lease, and a return for the final transfer, but not for each intermediate share. Deadlines and penalties are the normal ones covered in SDLT return deadlines and penalties.

What about Scotland and Wales?

SDLT applies only in England and Northern Ireland. Scotland has its own alternative property finance relief for LBTT in Schedule 7 to the Land and Buildings Transaction Tax (Scotland) Act 2013, with Revenue Scotland guidance at LBTT3017 to LBTT3020. Wales has equivalent reliefs in Schedule 10 to the Land Transaction Tax and Anti avoidance of Devolved Taxes (Wales) Act 2017. The structure is the same, but the return, relief selection and rates follow the devolved tax; see SDLT, LBTT and LTT compared.

What mistakes come up most often?

Paying SDLT on the lease or the final transfer because the relief code was not entered on that return.
Assessing the higher rates or first time buyers’ relief by reference to the bank instead of the customer.
Assuming the relief survives if the provider sells its interest to an investor that is not a financial institution.
Under a murabaha structure, the bank declaring less than market value on its purchase, which puts the exemption for the resale at risk under section 73(3).
Forgetting that the customer still needs a return when the final share or reversion is transferred, often many years later.

For the basic charge and rates, see Stamp Duty Land Tax explained.

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Reviewed by Christine Anderson, Broker, Solar Protect. Last reviewed 24 October 2026. Part of Accountapedia, the Solar Protect guide to UK tax and accounting. This page is general information, not personalised advice.