As a beneficiary of both a democratic and a religious tradition, I think that separation of church and state is good not just for states (if they happen to be liberal democracies), but also for religious communities (if they aspire to be self governing). In Britain, there are state funded religious schools, so school choice issues for religious schools get resolved by secular courts: Who Is a Jew? Court Ruling in Britain Raises Question .
"Britain has nearly 7,000 publicly financed religious schools, representing Judaism as well as the Church of England, Catholicism and Islam, among others. Under a 2006 law, the schools can in busy years give preference to applicants within their own faiths, using criteria laid down by a designated religious authority. "
The case in question is wending its way through the appeals court process. But it appears that, by accepting state funding, Britain's religious communities have let the state into the church, so to speak.
Update:Dec. 15. British High Court Says Jewish School’s Ethnic-Based Admissions Policy Is Illegal
Update: January 10: Faith schools facing admissions curb