In this year's Finance Bill, Chancellor Gordon Brown has once again demonstrated his favour for Islamic finance by reducing and simplifying the tax burden on Muslim investors and businesses. The process of making allowances and exemptions for Islamic finance, which started in 2003 and culminated in this year's Bill, has ensured that the UK is at the forefront of the global expansion of Islamic finance. Specifically, the Finance Bill has extended the stamp duty land tax (SDLT) reliefs (which were previously only available to individuals) to companies and trusts. This simple measure is set to have a significant impact on the UK commercial property market.

In the Finance Act 2003, murabaha and ijarah structures were given special SDLT status. Murabaha, or cost-plus financing, is where the bank buys the property and then sells it to the customer at an increased price which is paid by the customer to the bank in fixed instalments over a fixed period of time. Ijarah means leasing and describes the structure whereby the bank buys the property and leases it to the customer who then purchases the property from the bank at the end of the term of the lease. As these structures involve multiple transactions they can give rise to multiple SDLT charges. The Finance Act 2003 addressed this problem by allowing these transactions to be treated for SDLT purposes as if they were a simple purchase (or refinance) and therefore no additional SDLT would be payable.

The Finance Act 2005 which, as well as extending the reliefs to Scotland and resolving some accounting problems, took another big step forward by creating a specific exemption for a structure which is viewed even more favourably from a shariah (Islamic law) point of view: diminishing musharaka. This is similar to the ijarah leasing idea, but goes further by specifically dealing with the gradual transfer of ownership of the property from the bank to the customer during the term of the lease as capital contributions are paid. The literal meaning of musharaka is partnership and it is diminishing in that the bank's share in the partnership decreases over time. Without the exemption, any instalment which comprised a capital contribution would potentially be a separate transaction for SDLT purposes.

The major flaw with these provisions in the 2003 and 2005 Finance Acts was that they only applied between a financial institution and an individual. Their target was therefore primarily the residential market, which led some cynics to claim that they were more about targeting the Muslim vote rather than a serious attempt to create a level playing field for Islamic finance.

As with any section of society, it is not usually wise to make broad generalisations, and this is no different for the Muslim investor. They are made up of a wide range of individuals, from the religiously strict to the more pragmatic. However, to analyse the decisionmaking process of Muslim investors on a practical level, it might be helpful to define three separate categories for Muslims who wish to invest in real estate through corporate vehicles, and consider their performance in the market to date.

. Group A adhere most strictly to their faith and do not invest as they are not willing to compromise on their principles. Some of the banks which currently only offer residential Islamic mortgages say they have been routinely turning away requests for commercial property finance from these types of investors.

. Group B are the most pragmatic and have reluctantly gone ahead with conventional mortgages, either because they do not see any other option, or because they are less concerned by the shariah restrictions.

. The more innovative Group C use complex and imaginative (but less desirable) structures to over-come the shariah and tax hurdles.

However, when the Finance Bill 2006 receives royal assent, the SDLT reliefs for murabaha, ijarah and diminishing musharaka will at last be extended to companies and trusts. The simple provision which changes 'individual' to 'person' in sections 71A to 73 of the Finance Act 2003 opens the way for a new wave of commercial property finance and investment in the UK. To assess the impact of this legislative change, we can consider our three categories of Muslim property investors mentioned above.

. Group A – those who have thus far decided not to invest in commercial property might now decide to do so.

. Group B – many of those who have taken out conventional mortgages may well wish to refinance, most likely using a diminishing musharaka product.

. Group C – those who have already invested using more complex structures will no doubt be encouraged to invest further with the knowledge that they can now do so in a more shariah- compliant and simple way.

Progressively-minded banks, property investment funds and law firms with shariah capability are likely to share the rewards of this growth sector, which shows no signs of relenting.

Imam Qazi is an associate at Burges Salmon.