PAYMENT LINE: 03333 123 123

Have a question?

Shares, unit trusts & equity investments

Video: Zakat on shares & equity investments - Imam Abid Khan

Shares, unit trusts and equity investments that you have purchased with the intention to make a profit and resell – or through which you receive dividends are all Zakatable.

Differences arise amongst scholars regarding:

  • 1) The type of business that the company deals in
  • 2) Considering it similar to the Zakat on business and trade. This is the preferred opinion and the one that we at NZF adhere to

Types of shareholders

There are two types of shareholder:

  • 1) The person who buys shares as an investment and wants to attain dividends – this type of shareholder pays Zakat at book – NOT market value
  • 2) The person who buys shares to trade – i.e. trading stock. This type of shareholder must pay Zakat on the market value

Shares purchase for resale

  • Zakat should be paid on the market value of the shares

NOTE: there is no Zakat on options and extra value golden shares as trade in these matters is not permitted

For example, imagine you invest your savings in a few managed funds – if your prime intention when buying shares is to sell them for monetary gain, then the entire market value of the shares is subject to Zakat on an annual basis. This is no different from a shopkeeper who buys fruit in order to sell it at a profit, for example.

Shares purchased for investment and dividends

Shares that have been purchased for investment and benefitting from the dividends:

  • The company is obliged by the Sharia to pay the Zakat on behalf of the shareholders
  • The company should consider the money of all shareholders as the money possessed by a single person. If the company doesn't pay Zakat for one reason or another then the shareholder must pay Zakat on his own shares and dividends

Example 1

For example, if you have held an ISA for a few years as a long-term investment with no intention to sell, then Zakat is due on your proportionate ownership of the Zakatable assets of the companies in which you have invested. Normally this is done by finding out which stocks you own, how many shares you own and then using the company balance sheets to work out roughly what the Zakatable assets are in each firm. If it is difficult for you to determine this then simply

  • 1. Work out the market value for your holding. Let's say in this case it is £10,000.
  • 2. Take 40% of this value – this comes to £4,000
  • 3. Include this figure on the asset side of your calculation before applying 2.5% to all your assets. 2.5% of these assets would be £100

This is a proxy rule of thumb to help you factor in your share of the Zakatable assets in the stocks you hold through your ISA.

The increase and decrease in portfolio value is irrelevant - only the current value matters.

Example 2

Another example is if the prime intention is long-term investment, as an alternative way to store wealth, then Zakat is not due on the market value. However, two things that need to be considered:

  • 1. Dividend income: any dividend income that is generated should simply be taken care of when one is factoring in the amount of cash held for Zakat purposes. If all dividend income is saved, then Zakat will be paid on all of it. If it is all spent or reinvested, then nothing to worry about here.
  • 2. The underlying Zakatable assets of the companies in which you have shares: this sounds complicated but really isn't too difficult to get your head around. Business assets are intrinsically subject to Zakat, including cash, assets for sale, receivables etc. So the question is, if you hold shares in a certain business and if that business has assets that are intrinsically subject to Zakat, and if the management of the company is not paying Zakat on those assets on behalf of the shareholders, then should you not at least pay the proportionate amount of Zakat for these assets in line with your shareholding? That sentence was a bit of a mouthful, but if you break it up, we promise you it's easier than you think!

Shares on which Zakat are not due

The shares on which Zakat is not due on are:

  • Public treasury shares
  • Charitable endowment shares i.e. it is generally not permissible for Zakat to be invested in an endowment because Zakat needs to be distributed to worthy recipients - i.e. the transfer of wealth needs to take place. That said, endowments are an important part of the framework of a community but should be established with Sadaqah funds.
  • Charitable authority shares
  • Non-Muslim owned shares
  • Zakat on buildings and non-arable leased land: The shareholder should pay Zakat on the revenues of his shares and not on the value of the shares themselves. Nisab amount is 2.5%
  • No Zakat on options and extra value of golden shares as trade in these matters is not permissible.

Shares Recap

  • If shares are purchased with the express intention for resale then the entire holding is subject to Zakat
  • If, however, shares are purchased as an investment to generate dividends, then as Zakat is only due on the Zakatable assets of the firm, a realistic attempt must be made to calculate the percentage of the shareholding relating to Zakatable assets. Please visit alqalam.org.uk for more information.
  • Any dividends received should be added to one's cash balance for Zakat purposes.

Related Articles

Ask a Question

Want to ask us a question? If our FAQs don’t have the answer, fill in this form and we’ll get back to you.