There is a new type of tax relief very similar to the Enterprise Investment Scheme (EIS) tax regime but applicable to investments into social enterprises rather than trading companies which attract EIS. The tax relief an investor into social enterprises can claim is generous and extends to both income tax and capital gains, but as can be expected with tax legislation, there are rules and regulations applicable to Social Investment Tax Relief (SITR) as we explain below. We work with investors and also work with the social enterprises seeking investment setting up their share structure and trading arrangements to stand the best chance of fund raising and operating successfully.
Tax benefits available under Social Investment Tax Relief
The tax savings for investors under SITR are split into:
- Income tax relief – Investors can claim tax relief of 30% of the amount invested into the social enterprise up to an annual maximum of £1 million. Tax relief can also be carried back to be claimed in the previous tax year.
- Capital gains tax hold over relief – Payment of a capital gains tax liability can be deferred if an amount equal to the gain is reinvested in a social enterprise. The investment must take place within one year before or up to three years after the date on which the gain arose. The gain can arise from any type of asset but it must have been made between 6 April 2014 and 5 April 2019. Capital gains tax will be due if the social enterprise investment is sold or the relevant requirements (outlined below) cease to be met.
- Capital gains tax disposal relief – capital gains on the social enterprise investment will be exempt from capital gains tax as long as all the conditions set down by HMRC are met. The investor must have held the investment for a minimum of three years and the income tax secured on investment must not have been clawed back.
Example:
Assume that Fred sell shares and makes a capital gain of £72,000. If he makes a qualifying SITR investment within the time limits of £30,000 he can claim that £30,000 of tax is deferred until the SITR investment is sold. Fred would remain liable to CGT on a chargeable gain of £72,000 less £30,000 = £42,000.
What are qualifying social enterprises?
Social enterprises are businesses with a primary social objective which trade in a variety of sectors such as sport and leisure.Social enterprises include community interest companies and charities. The aim of social enterprise is to combine business practices with social purposes to find innovative solutions to social problems, such as homelessness, high rates of re-offending, and issues with the environment. There are restrictions on the type of investment which can qualify for SITR. The restrictions include that within 28 months of the date of the investment all of the money raised must be used for the purposes of the social enterprise. There are other restrictions designed to ensure that investors do not secure an unfair advantage nor control more than 30% of the social enterprise.
Interestingly, although the maximum SITR investment an individual can claim relief on is £1 million per tax year, the maximum investment which any one social enterprise can receive is subject to an overriding cap covering a three year period which is far less than the individual cap since it is around £286,200 (a conversion from euros is required).
The investment into the social enterprise can be by way of shares or, unlike the position under EIS, loans.
HMRC will determine upon application whether the social enterprise qualifies and will monitor whether the social enterprise meets the requirements during the period of the investment. Before investors can claim tax relief, the social enterprise must complete an SITR compliance statement and send it to HMRC.
Catherine Gannon is a solicitor and a Chartered Tax Adviser and her background in tax and accountancy combined with many years of practice as a solicitor working with investors makes the commercial team at Gannons ideally suited to advise on the latest ways in which charities and social enterprises can attract funding and operate.