Social Investment Tax Relief: a tax incentive to make the world a better place
Considerable recognition has been given to two investing tax schemes in recent years, namely the Enterprise Investment Scheme (EIS) and Seed Enterprise Investment Scheme (SEIS). Whilst these marked the government’s intention to encourage investment in start-up companies and early stage ventures, a further scheme was introduced in 2014 to encourage investment in social enterprises and charities – Social Investment Tax Relief (SITR). In simple terms, SITR offers tax incentives for those investors who are not only looking for a return on their investment, but who also wish to support a certain cause.
Social enterprises are defined as businesses that trade to tackle social problems, improve communities, people’s life chances, or the environment. They make their money from selling goods and services in the open market, but they reinvest their profits back into the business or the local community. Such businesses represent a rapidly growing sector, with latest figures reporting approximately 70,000 social enterprises in the UK, contributing £18.5 billion to the UK economy and employing a workforce of nearly 1 million. Despite a vast array of such enterprises existing in our region and beyond, SITR remains a little known tax relief.
How is Social Investment Tax Relief different from other investing schemes?
Although modelled on the Enterprise Investment Scheme, Social Investment Tax Relief is unique in that it applies solely to charities and social enterprises and is the only scheme that can apply to certain debt instruments as well as shares. In fact, the eligibility of debt finance makes SITR radically different from SEIS and EIS, both of which are only available for equity investment.
Social Investment Tax Relief applies to investments made post 6 April 2014 and enables investors to deduct 30% of the cost of their investment from their income tax liability (for the tax year in which the investment is made or the previous tax year, if 2014/15 or later). However, the investment must be held for a minimum period of 3 years for the relief to be retained.
In the event that investors have chargeable gains in that tax year, they can also defer their Capital Gains Tax liability provided they invest their gain in another qualifying social investment. Tax will instead be payable when the social investment is sold or redeemed. In addition, CGT is not payable on any gain on the investment itself although, of course, income tax is payable in the normal way on any dividends or interest on the investment.
The amount that can be invested is currently capped at approximately £290,000 but may change to £5 million (subject to a lifetime cap of £15 million) after European Commission approval is obtained.
Naturally, as with any investment, the element of risk necessitates detailed consideration in addition to professional advice being sought, but the availability and very essence of Social Investment Tax Relief certainly seems to be good for investors, good for business and good for society as a whole.