Mariam Khan: Bridging Legal Worlds – Islamic & English Inheritance Law, IHT Planning, and More

Inheritance Tax in the UK is a tax levied on the estate of a deceased person. It includes property, possessions, and money. The current threshold for IHT is £325,000, which means estates worth less than this amount are not subject to the tax. However, assets worth more than £325,000 are taxed 40%.

There are several common misconceptions surrounding Inheritance Tax (IHT) in the UK. Here are some of them:

1. IHT is only for the very wealthy.- One common misconception is that IHT only applies to the extremely wealthy. While it’s true that there is an exempt amount (the nil-rate band) that allows a certain level of assets to be passed on tax-free, many individuals and families can still be subject to IHT, especially if they own valuable property or have substantial savings.

2. I’ve given away my assets, so they’re exempt from IHT – There is a common belief that if you give away your assets before you die, they won’t be subject to IHT. However, gifts made within seven years before death can still be subject to IHT, and there are specific rules regarding how gifts are treated.

3. IHT can be entirely avoided through careful planning.- While it’s possible to reduce IHT liability through planning and various exemptions and allowances, it’s very difficult to entirely avoid IHT without complex and often impractical financial arrangements. Some level of IHT may still apply to most estates.

4. Spouses are always exempt from IHT- While it’s true that assets passed between spouses or civil partners are generally exempt from IHT, there can still be IHT implications when the second spouse passes away.
This is particularly relevant if the surviving spouse inherits assets that exceed the nil-rate band or residence nil-rate band.

5. IHT is the same for everyone – The rules and exemptions related to IHT can be quite complex and can vary based on individual circumstances. Factors such as the value of the estate, the types of assets owned, and the relationship of the beneficiaries can all influence how IHT is applied.

6. I can simply give away my assets before I die to avoid IHT – While lifetime gifting can be a strategy to reduce IHT, there are rules in place to prevent individuals from giving away assets shortly before death to avoid tax. Gifts made within seven years before death may still be subject to IHT, and there are specific rules governing the treatment of such gifts.

Islamic inheritance laws are based on Sharia, and they often differ from English laws. In Islamic law, specific rules outlined in the Quran and Hadith (sayings and actions of the Prophet Muhammad) dictate how to divide an estate among heirs, and these rules differ significantly from English law in several key ways.. It’s important to note that Islamic inheritance laws are primarily based on religious principles, while English law is based on a secular legal framework. Here are some of the main differences between the two:

Distribution Principles
Islamic Law: Islamic inheritance law is based on a fixed and detailed formula specified in the Quran. It prescribes how the estate should be distributed among specific heirs, with close relatives receiving priority. The shares of each heir are predetermined, and it is considered a religious duty to follow these guidelines strictly.
English law allows individuals to specify in their wills how they want their assets to be distributed. There is no fixed formula, and people have the freedom to distribute their assets as they see fit, as long as they meet certain legal requirements. English law does not mandate a specific distribution pattern based on familial relationships.

Heirship:
Islamic inheritance law designates specific family members as heirs, including parents, spouses, children, and other close relatives. The shares allocated to each heir depend on their relationship to the deceased and their gender.
English law allows individuals to choose their beneficiaries freely, including non-relatives or organisations. There is no predefined list of heirs, and people can leave their assets to whomever they wish within the limits set by law (e.g., spouses and children have certain legal rights).

Gender Equality
Islamic inheritance law does not provide equal shares for male and female heirs. In most cases, daughters generally receive half the share that sons do. However, male heirs may balance this with other financial responsibilities, such as providing for their families.
English law promotes gender equality in inheritance. Spouses and children have equal rights to inherit, and gender does not play a role in determining the size of one’s share.

Testamentary Freedom
Islamic law places significant importance on following the prescribed distribution pattern and encourages adhering to it. Deviating from these guidelines may lead to disputes among heirs.
English law grants individuals the freedom to create a will according to their preferences, provided it adheres to legal requirements. There is no religious obligation to distribute assets in a particular manner.

Recognition of Non-Muslims
Islamic inheritance laws apply primarily to Muslims. These laws generally do not apply to non-Muslims, and their inheritance follows their respective religious or secular legal systems.
English law applies to all individuals residing in England, regardless of their religious beliefs. It provides a legal framework for inheritance that is separate from religious considerations.
Challenges can arise when trying to reconcile Islamic and UK inheritance laws, particularly in cases where the two systems conflict. Legal and religious advice is crucial in such situations.

To ensure estate division aligns with cultural/religious beliefs and UK legal requirements, individuals can create a valid Islamic will. Muslims living in a non-Muslim country should write a tax-efficient Islamic Will to ensure that they distribute their assets in accordance with the prescribed shares.

Lasting Power of Attorney allows someone to appoint a trusted person to make financial and healthcare decisions on their behalf if they become unable to do so.

Gifts made within seven years before death are subject to IHT, with a sliding scale of tax liability. However, if you survive for at least seven years after making the gift, it falls out of the IHT calculation.

Gifts to registered charities are typically exempt from IHT. Additionally, if you leave at least 10% of your estate to charity in your will, it can reduce the overall IHT rate on the rest of your estate.

Placing your pensions and life insurance policies in trust can help protect them from IHT. This means that IHT purposes do not consider the benefits from these policies as part of your estate.

Assets passed to a surviving spouse or civil partner are generally exempt from IHT. This means that you can pass on your assets to your spouse without incurring IHT. But this is against the shariah law therefore, it is essential to make a tax efficient Islamic will.

The residence nil-rate band is an additional tax allowance that applies when you leave your main residence to your children or grandchildren.
You can reduce the IHT liability on your estate, but you must meet specific conditions for it to apply.

Common estate planning issues include lack of clarity in wills, failure to consider tax implications, and not accounting for changing circumstances.

For those new to estate planning and IHT, seeking professional advice and creating a well-thought-out plan is a wise first step. They must consider Guardians for their children, executors and trustees, funeral wishes and most importantly Islamic shares that is prescribed in the Quran.