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Social Investment Tax Relief: doing well and doing good
Recognising the growing importance of “impact investment”, with investors seeking investments with social and environmental benefits as well as financial returns, Social Investment Tax Relief (SITR) offers valuable tax reliefs to investors to social enterprises.
Social enterprises include charities, community interest companies and community benefit societies that run a qualifying trade.
SITR is modelled on the long-established and successful Enterprise Investment Scheme and is designed to increase the availability of capital to social enterprises that might otherwise struggle to raise finance through traditional routes.
Qualifying SITR investments attract income tax and capital gains tax relief.
SITR & Income Tax
Income tax relief is given by way of an income tax reduction of up to 30% of the amount invested into the qualifying enterprise.
A claim may also be made as if all or part of the amount eligible for relief had been invested the previous tax year.
The maximum investment that can be made in any year is £1m, i.e. up to £300,000 of relief can be claimed in a single tax year.
An investor is not eligible for relief on an amount invested if relief has also been obtained under EIS or SEIS.
If the SITR investment is sold within 3 years of purchase, the 30% income tax reducer is clawed back.
There is no tax exemption for any income arising on the investment. Any interest or dividends arising from the investment are subject to income tax at the individual’s marginal rate.
Capital Gains Tax & SITR
Any gain arising on the disposal of the investment is not subject to capital gains tax as there is a specific exemption on the basis that the investment is held for at least 3 years.
Any allowable losses arising can be utilised against current or future year gains. In certain circumstances a claim can be made to utilise a loss against the individual’s income of the current and or prior tax year.
Similar to EIS relief, in addition to income tax relief, capital gains tax deferral relief is available whereby gains arising on the disposal of another asset can be deferred by way of a reinvestment of proceeds into a qualifying social enterprise. This is on the basis that the investment into SITR is within 12 months before or 3 years after the original asset’s disposal. As the gain has been deferred, no tax is due in the tax year of disposal.
The chargeable gain is deferred until the SITR investment is sold or redeemed or ceases to be eligible under the SITR requirements, upon which it will once again become chargeable.
The SITR Investment vs. EIS and SEIS Reliefs
A key difference between EIS and SITR is that like with EIS, the investment can be structured as a loan rather than equity.
The capital structure of many social enterprises precludes issuing shares since they do not have share capital, e.g. companies limited by guarantee rather than share capital are common.
To qualify the social enterprise must satisfy a number of conditions including:
• Fewer than 250 full time employees, gross assets of less than £15m and it cannot be controlled by another company or be listed on a stock exchange.
• Where investments are made within the first 7 years of the of the SITR first trading, the maximum the SITR can raise is £1.5m over its lifetime.
Advanced assurance can be applied for from HMRC to check that the enterprise meets the conditions to qualify for SITR and this is strongly recommended.
Individuals who are employees or paid directors or those who hold more than 30% of the voting rights or loans are not eligible for income tax relief.
Is the SITR ideal for you?
Gift Aid and tax relief for gifts of shares and property to charity have existed for many years, but those are reliefs on donations rather than relief for investments. SITR therefore aims to encourage ‘doing good’ at the same time as potentially earning an investment return.
For more information on the SITR and related tax reliefs, contact our helpful team of chartered tax advisers, alternatively you can read more abut tax reliefs below.