Tax Talk: Making a Will as a Muslim

IHT considerations

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Preparing a Will is complicated for everyone. Here we explain some of the specific requirements and tax implications under Sharia law.

Sharia law is based on the Quran (regarded by Muslims as the direct word of God) and the Sunnah (the words and acts of the Prophet Muhammad). Sharia provides a framework for life as a Muslim and governs everything that a Muslim does.  

The importance of leaving a Will

There are specific requirements under Sharia law to make a Will. According to the Islamic scholar Bukhari, the Prophet said, “It is not permissible for any Muslim who has something to bequeath to stay for two nights without having his last Will and testament written and kept ready with him”.

The reason for this is to avoid dispute or ill feeling between the benefactors after the person has passed away. It also means the executors can move swiftly to deal with the estate.  

An Islamic Will is not only required for succession but, like all other Wills, it needs to address the following issues:

  • funeral and burial wishes
  • who will be in charge of administering the estate
  • who should look after the children on death
  • who gets specific gifts and what they are
  • any charitable donations to be made.

General succession rules

Sharia law stipulates that at least two-thirds of a deceased’s estate must be distributed among surviving relatives. The heirs’ entitlement is fixed, depending on the number and nature of the heirs who survive. This means it’s not possible to say in advance who will inherit. Only at the date of death can the division be calculated. But as a general guide note that, if all the heirs are alive, the division may be as follows:

  • a surviving wife is entitled to 12.5%
  • a surviving husband is entitled to 25%
  • a surviving mother and father are entitled to 16.67%
  • the balance passes to children, in so far as a male is entitled to double the share that a female would receive. This is because the men in Islam have a religious duty to maintain their spouses and offspring.

With the remaining one third of the estate, interpretations of Sharia law vary, and some provide the flexibility to distribute it as you wish. But there is also a view that the ‘freely disposable’ one third cannot increase the shares of those who are entitled to a fixed share (a wife, husband, parents, children, and so on). So this is a point that needs to be checked by an Islamic scholar.

Sharia and the intestacy rules

When a person dies without leaving a valid Will, their estate is distributed in accordance with the intestacy rules. Under these rules there is a prescribed formula for how the estate is divided – but this differs from Sharia law. So as a Muslim it’s advisable to have a Will in place to prevent this situation.

Alternatively, a deed of variation may be made within two years of death so that the estate is divided in accordance with Sharia, but this will require agreement from all the heirs who benefited from the intestacy rules.

Inheritance tax (IHT) considerations

Generally, on death assets transferred to a spouse are exempt from IHT. The exception is where the estate passes from a UK-domiciled spouse to a non-UK-domiciled spouse, in which case the exemption is restricted to the nil rate band (£325,000) and the remaining estate is taxed at 40%.

As in Sharia law, the majority of the estate may pass directly to the children or even to the parents, the spouse exemption may not be utilised fully and the estate may be subject to a higher level of IHT. In order to avoid this scenario, Sharia law does allow for making lifetime gifts or creating trusts.

Lifetime planning

Sharia law does not place any restrictions on lifetime giving. This means individuals are free to make potentially exempt transfers (PETs) for IHT purposes without incurring a charge to tax, provided they live seven years from making the gift. It’s also important to consider the capital gains tax (CGT) consequences when gifting non-cash assets. Before making such gifts we would recommend you seek tax advice. 

Note too, that lifetime gifts between husband and wife are exempt from IHT and CGT.

Transferring assets into trust

Under Sharia law you may create a trust during your lifetime or on death. A trust in Islam is known as ‘Waqf’, which is defined as an Islamic endowment of property to be held in trust and used for a charitable or religious purpose. According to Islamic teachings, providing for one’s family is an act of charity, which means that the Waqf is permitted.

Once the trust is created, the wishes of the settlor must be respected, so long as they do not go against Sharia law. For example, investment powers should be Sharia compliant. What’s more, depending on interpretation, there may be certain restrictions on beneficiaries and succession when creating the trust.

A Waqf can also be included in a person’s Will. But the assets should be no more than one third of the total wealth of the individual, because this is the portion of the estate that can be freely distributed under Sharia law.

For UK tax purposes the Waqf is treated as any other trust.

PKF Littlejohn cannot advise on Sharia law. But we can work with your Islamic scholar to provide UK tax advice on making a Will, gifting assets or creating a trust.