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1 s t E t h i c a l C h a r i t a b l e Tr u s t ’s G u i d e t o Understanding

1 s t E t h i c a l C h a r i t a b l e Tr u s t ’s G u i d e t o Understanding & Calculating Zakah Edition V TM Charitable Trust Contents The Importance of Zakah TM 1st Ethical Charitable Trust Springfield Court Summerfield Road Bolton BL3 2NT Phone: 01204 559914 Fax: 01204 399786 Email: info@1stethical.com Website: www.1stethical.com Charitable Trust page 1. Introduction 3 2. What is Zakah? 4 3. Who Pays Zakah? 5 4. Who Receives Zakah? 5 4. Assets Subject to Zakah 6-7 5. When to Pay Zakah 8 6. Conditions for the Validity of Zakah 9 7. Zakah on Debts - Receivable and Payable 10-11 8. The Zakah Self-Assessment Form 12-13 9. Tax-Efficient Charitable Donations 14 9. Summary 15 The contents of this guide have been verified by the Al-Qalam Shariah Scholar Panel. www.alqalam.org.uk 1st Ethical: Charitable Trust 3 2 1st Ethical: Charitable Trust All praise be to Allah, Creator of the heavens and the earth, and Owner of the Day of Judgement. We bear witness that there is no-one worthy of worship other than Allah (SWT), and that the Prophet Muhammed (SAW) is his final messenger. Islam encourages trade, entrepreneurial activity and the equitable distribution of wealth. In order for commerce to benefit society, Islam imposes several obligations on those involved in wealth-creation. Islam also encourages Muslims to be kind and helpful. This attitude is often manifested through the act of giving in charity. Whilst certain types of charity (Sadaqah) are optional, Islam has made the payment of Zakah a compulsory obligation upon each Muslim. Although Zakah is a fundamental pillar of faith, many Muslims are confused by the subject and are either paying Zakah incorrectly or worse still not paying it at all. Muslims may also be unaware of valuable tax concessions available on donations made to UK registered charities. These concessions can enhance the value of donations by at least 25% for a basic rate tax payer and even more for a higher rate tax payer, and are easily claimable in most cases by signing a simple declaration. This guide offers practical advice to UK based Muslims on tax-efficient Zakah-giving according to the Hanafi school of thought. People not affiliated to the Hanafi school should consult a scholar of their own choosing for further guidance. Zakah is the third pillar of Islam. It’s important is such that the Quran refers to Zakah in 82 separate verses and has associated Zakah immediately after Salah on 32 occasions. Scholars infer the giving of Zakah has both an outer and an inner dimension. The outer dimension involves the purification of a Muslim’s wealth. Zakah serves as a filter to keep out impurities from a believer’s wealth and for that wealth to then increase in a manner pleasing to Allah. The inner dimension suppresses the ego, and quells ugly tendencies such as greed, jealousy and miserliness. The Quran commands Muslims to: Establish regular prayer and give Zakah (73:20) The Prophet Muhammad (SAW) states: ‘If someone is given wealth by Allah but does not pay its Zakah, that wealth will appear to him on the Day of Judgement in the form of a bald serpent with 2 horns, encircling him and squeezing him all day, then holding him by the lips and telling him, “I am your wealth, the treasure which you hoarded”’ . (Bukhari & Muslim) The Importance of Zakah What is Zakah? Who Pays Zakah? Who Receives Zakah? 1st Ethical: Charitable Trust 5 4 1st Ethical: Charitable Trust Those required to pay Zakah must be: Those barred from receiving Zakah: Example 1 Zaid has valued his Zakatable assets at £5,000 on his Zakah anniversary. He owes £4,900 to his brother and has no money owing to him. His Zakatable assets are therefore £5,000 - £4,900 = £100, which is below the Nisab threshold. Zaid is therefore not liable to pay Zakah. Example 2 Zahida has valued her Zakatable assets at £3,000 on her Zakah anniversary. Zahida owes £1,000 to various people. Zahida is also owed £3,000 by a friend. Her Zakatable assets are therefore £3,000 - £1,000 + £3,000 = £5,000. This makes her Zakah liability 2.5% of £5,000 = £125. Zakah is payable at a rate of 2.5% on all assets including those within the Nisab threshold. Those entitled to receive Zakah: What is Zakah? Zakah is commonly referred to as either a tax or as charity. Neither of these is accurate as Zakah is a divine duty. Zakah is considered a right of the poor over the rich. Withholding it is tantamount to depriving the poor of their God-given right. Allah (SWT) says of the wealthy in the Qur’an; ‘In their wealth there is a known share for the beggars and the destitute’ (70:24-25) ‘Take alms from their property that you may purify and sanctify them and pray for them. Verily your prayers are a comfort for them’ (9:103) Definition of Nisab The Nisab is the minimum amount of wealth upon which Zakah is payable. It represents the guaranteed minimum financial floor above which an individual is deemed to be ‘Sahib-un- Nisab’ (owner of wealth) and therefore liable to Zakah. The Nisab limit was set by the Prophet (SAW) at 20 Mithqaal of gold or 200 dirhams of silver. These measures are equivalent to 87.48 grams of Gold and 612.36 grams of Silver respectively. If a person only has Gold as an asset, then the Nisab measure for Gold must be used. If however the person has a mixture of assets, then the Nisab level for Silver should be used. To ascertain the current monetary equivalent of the Nisab limit, it is necessary to establish the market rate for a gram of Gold & Silver. This can be obtained from www.kitco.com. The current market rate (July 2009) for a gram of 24 carat Gold is £20.37, and £0.29 for a gram of Silver. Therefore, the Nisab threshold for Gold is approximately £1781.96 and for Silver it is £177.58. A person will only pay Zakah if his Zakatable assets, after adding and subtracting debts owed either to or from others, is equal to, or in excess of £177.58. Preference should be given to relatives over the general public as Islam places great emphasis on the virtue of family ties. When giving Zakah, it is not necessary to inform the recipient of the nature of payment. (e.g. you can disguise the Zakah payment as a gift). The Quran, in Surah 9 verse 60 details those categories of people entitled to receive Zakah. The primary recipients of Zakah are the poor and destitute. These can be defined as those people whose total assets, excluding assets used for basic necessities (house, car furniture etc.), and after deducting outstanding basic living expenses and money owed to others, are less than the Nisab level. • Sane • Adult (have reached puberty) • Muslim (Zakah is not paid by non-Muslims) • Sahib-un-Nisab (owner of wealth equal to or above the level of Nisab) • A Hashimi (Descendant of the Prophet Muhammed SAW) • The payer’s descendents • The payer’s ascendents • The payer’s spouse Assets Subject to Zakah 1st Ethical: Charitable Trust 7 6 1st Ethical: Charitable Trust 3. Business Assets (including Stocks, Shares, Property and Pensions) Assets can be categorised as follows: i. Property & other Fixed Assets The Zakah treatment for these assets is principally based upon the intention behind the purchase. We can classify intentions as follows: Clear Intention to resell If the asset is purchased with the express intent to resell at a profit, then that asset effectively represents ‘stock in trade’ and therefore the entire value of the property/asset stock is subject to Zakah. Clear intention to retain asset If the asset is purchased with the intention of retaining ownership, eg investment property, the asset is not subject to Zakah. Any profit from rental income received is fully subject to Zakah. Clear intention to reside in property If no part of the property is being let out and it is used entirely as residence then it is exempt from Zakah as it falls under the category of ‘personal use’. No clear intention If there is no clear intention behind the purchase, then no Zakah is payable on the value of the asset. Any profit received from rent is still liable to Zakah. ii. Finished Goods, Work in Progress and Raw Materials These are subject to Zakah, as they are purchased with the express intention for resale. iii. Shares / Unit Trusts / Equity Investments If shares are purchased with the express intention for resale then the entire holding is subject to Zakah. If however shares are purchased as an investment to generate dividends, then as Zakah is only due on the Zakatable assets of the firm (e.g. raw material and finished goods), a realistic attempt must be made to calculate the percentage of the shareholding relating to Zakatable assets. iv. Pensions Zakah treatment of Pensions is covered uploads/Geographie/ understanding-amp-calculating-zakah-1stethical-charitable-trust-x27-sguideto.pdf