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  1. Wealth
November 12, 2018

What you need to know about the ‘Social Investment’ relief

By Spear's

Here’s a practical and legal insight into a lesser known tax relief, which is one of David Cameron’s ‘Big Society’ legacies, writes Sophie Wettern

As always, the recent Budget was accompanied by a flurry of newspaper articles analysing the proposed changes and television pundits holding forth on their pet economic peeves.

But hidden among ‘Fiscal Phil’s’ (rather unwieldly) jokes was confirmation from the government that it will publish a call for evidence on Social Investment Tax Relief (SITR). For those of you who have been following the progress of this relief, this will not come as a surprise, arriving as it does two years after the government announced in the 2016 Autumn Statement that it would undertake a review of SITR within two years of enlargement of the scheme. But what about those of us who are not familiar with this little-known relief?  Here are the key points about this tax relief you’ve never heard of…

SITR was introduced by the government in 2014 following consultation with social enterprise stakeholders as part of David Cameron’s push for a ‘Big Society’. While social enterprises fill a key gap between the state and charitable sectors, often supporting low-income communities, they frequently face funding difficulties which prevent them from scaling up their activities. In large part, this has historically been due to lack of access to capital caused by high commercial interest rates and a lack of assets to borrow against. The purpose of SITR was to alleviate the funding gap that many social enterprises face by encouraging investment through the generation of a financial return for investors alongside a positive social return.  While in many ways the relief is similar to the Enterprise Investment Scheme (EIS), SITR is more flexible, with investments able to be structured as equity or debt (rather than just equity).

So how does the relief work? You can’t just invest in any social enterprise.  Organisations are required to have a ‘defined and regulated social purpose’, meaning they must be a community interest company or similar.  They must be carrying out a qualifying trade, and they must have fewer than 500 employees and gross assets of no more than £15 million.  Investors are only able to claim tax relief once social enterprises have confirmed with HMRC that they (and the investment) meet the conditions of the scheme.

To make such investment attractive to investors, the government offers personal tax reliefs. An investor making an eligible investment can deduct 30 per cent of the cost of their investment from their income tax liability either for the tax year in which the investment is made or the previous tax year.  Capital gains tax relief is also available – an investor who uses a gain from the sale of an asset to invest in a social enterprise can defer capital gains tax on the gain, provided the investment is made between one year before and three years after the sale of the asset.  In addition, if the investment is by way of subscribing for shares, any gain realised on the disposal of those shares will not be subject to tax provided certain conditions are met.

What about the limits?  Individual investors can invest up to £1 million per tax year and can invest in more than one social enterprise, whilst a social enterprise can raise up to €344,827 in any rolling three-year period.

There have undoubtedly been some SITR success stories.  An example regularly given is that of community football club FC United of Manchester which is active in youth work, school holiday play schemes and adult education.  The football club was able to use funding from SITR to help build a new stadium, giving it a permanent base for community outreach work.  Overall, however, take-up has been much lower than expected – to the end of the 2016-17 tax year, only 50 social enterprises have raised funds of £5.1m through the scheme. Restrictions around the accessibility of the relief are often blamed for this, with many organisations that could benefit being deemed ineligible due to legislative restrictions.

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In a world where investors are ever more interested in the ethical implications of their money, the proposed review comes at a welcome time for both investors and the social enterprises they seek to benefit.

Sophie Wettern is an associate at boutique private wealth law firm Maurice Turnor Gardner LLP

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