In the December 2013 Autumn Statement, Chancellor George Osborne announced that  the UK would lead the agenda for responsible recovery through the introduction of a new tax relief designed to promote investment in social enterprises. Jane Wilson, a manager at  Bond Dickinson Wealth Limited, takes a look at the relief, aptly named ‘Social Investment Tax Relief’ (SITR), which became available for UK investors on 6 April 2014.

Social investment is not, in itself, a new concept in the UK. Institutions such as Big Society Capital offer investors the opportunity to gain exposure to charities, social enterprises and voluntary organisations with the aim of promoting enterprise to support economic regeneration and community cohesion. To date, however, products such as social impact bonds, social corporate bond funds and social loan funds have remained relatively unknown and inaccessible for private investors.

What are Social Enterprises? 

The Finance Bill 2014 defines a ‘social enterprise’ as a community interest company, community benefit society or charity. The enterprise will trade with social objectives  at its core; however they  may operate in a variety of sectors, including healthcare, sport and leisure. The enterprise must have fewer than 500 employees and a value of no more than £15 million before the investment, and £16 million following the investment.

Why introduce Social Investment Tax Relief?

The government believes that many social enterprises are currently experiencing difficulty in raising capital from private investors and commercial lenders. Recent cuts to public services, however, have made the demand for capital higher, therefore SITR aims to make investment into social enterprises more appealing and accessible.

What are the qualifying investments?

Investment into qualifying social enterprises will take the form of a subscription for new shares or by purchasing debt (i.e. a loan) in the social enterprise. Social impact bonds, which fund the provision of a service delivered by a social enterprise, will also fall within the remit of a qualifying investment.

It is anticipated that there  will be scope in the future for indirect investment in social enterprises, whereby investors can pool their funds to support a variety of social enterprises.

It will not be possible to invest in a social enterprise of which you are an employee, partner, trustee or paid director. Shareholders with over 30% of the share capital or voting power will also be exempt from investing in the social enterprise in which the shares are held.

How will the tax relief apply?

Individuals who make an investment into qualifying social enterprises will be entitled to claim tax relief at a rate of 30% of the amount invested, on a maximum annual investment of £1,000,000. The relief will be deducted from the individual’s tax liability for the year of investment, to the extent that there is sufficient tax liability against which to offset it. Any excess relief will be lost.

Investors need not be UK resident and a claim can be made up to five years after 31 January following the tax year in which the investment is made.

There is a ‘carry-back’ facility which allows all or part of the amount invested in one tax year to be treated as having been paid in the preceding tax year. The SITR rate for the earlier year will then be applied to the investment. Please note that there is no SITR for a tax year earlier than 2014/2015.

The scheme will allow individuals who make investments in social enterprises to defer Capital Gains Tax (CGT), subject to certain conditions. Any gain on the investment itself will also be free from CGT as long as the investment has been held for at least three years.

Please note that if no claim to Income Tax relief is made, then any subsequent disposal of  the investment will not qualify for exemption from CGT.

Is SITR for you?

Tax advantaged schemes which invest in small and medium enterprises are likely  to display above average levels of volatility and advice should always be sought before investing in high risk assets. Bond Dickinson Wealth Limited are experienced at assessing the needs of our clients and establishing what investments may be suitable for you. The legislation governing SITR is expected to become law when the Finance Bill receives Royal Assent in July 2014.