Introduced in 2014 and expanded in 2017, Tax relief for social investments (SITR) enables individuals to help social enterprises grow by providing tax breaks on investments.
Under SITR, an individual can subscribe or borrow shares in a social enterprise and benefit from a 30% income tax reduction. For example, if an investor lends £ 1,000 to a social enterprise, the real cost to the investor is only £ 700. But the social enterprise is getting £ 1,000 much-needed funding to help it grow in a sustainable way and make a more positive social impact.
Charities, not-for-profit companies, certain types of not-for-profit companies and so-called “accredited social impact contractors” 1 are considered to be “social enterprises” for the purposes of the SITR. Social Enterprises that have had sales for less than 7 years can raise up to £ 1.5M under SITR. Older businesses can raise up to £ 200,000 to £ 290,000.
Here are the tax breaks an investor can enjoy under SITR:
- Income tax relief – 30% of the investment amount will be deducted from the investor’s income tax liability for the year of investment.
- Deferment of capital gains tax – If a taxable profit is reinvested in a SITR qualifying asset, the CGT obligation for that profit will be deferred until the SITR asset is sold.
- Tax-free profits – Capital gains are exempt from capital gains tax. However, this only applies to capital gains – e.g. from the sale of shares. Interest and repayment bonuses on debts would be taxed as income and are therefore not tax-exempt.
Investments in stocks can be exempt from inheritance tax if they were held for at least two years before death. However, investments in the form of loans are not exempt from the IHT.
Investments in stocks may be loss exempt from income tax or capital gains tax, but debt is not loss exempt from income tax and is only eligible for capital gains exemption in certain circumstances.
Investors wishing to invest under SITR can invest in individual social enterprises or through a SITR “fund”. SITR funds work just like an unapproved EIS fund, namely:
- Each investor signs some form of investment management agreement that mandates the fund manager to invest the investor’s money in social enterprises eligible for SITR.
- Investors’ funds are invested over a period of time (typically two or three tax years).
- Each time the Fund makes a SITR qualifying investment, a portion of the investment is allocated to each investor and tax relief is then taken on that investment.
- The investment is usually held on behalf of a nominee on behalf of all investors in the Fund.
- Unlike EIS, there is no concept of an “approved” SITR fund. Tax relief can therefore only be claimed for qualified investments via the fund – there is no tax relief if an investor brings money into the fund for the first time. However, there is a possibility that an investor may carry back an investment to the previous tax year in order to expedite the eligibility for income tax relief.
With the decision of the Chancellor in the spring budget to extend the SITR until April 2023, the immediate loss has been averted for the time being. The extension by two years was welcomed by many as a positive step. Big Society Capital worked with Social Enterprise UK, Resonance and Co-ops UK to maintain and develop SITR. It still has significant potential to stimulate investment in charities and social enterprises and provide these organizations with much-needed, affordable investments. However, the extension raises the question of what reforms are currently needed to enable SITR to achieve its full potential. Now that a decision has been made about SITR, there is a chance that the system could be tweaked to make it more beneficial, such as:
- Approving a wider range of charities and social enterprises by lifting the restrictions that exclude larger charities.
- Enabling a broader range of activities by expanding the accreditation system for nursing homes to include other excluded activities.
- Take advantage of the opportunities offered by the post-Brexit landscape (the government is currently discussing a state aid replacement system and hopes that SITR could have more flexibility in the future).