The government is pressing ahead with the proposals announced last year to provide tax incentives for investment in qualifying social enterprises. In certain circumstances capital gains will be able to be deferred with qualifying investments; capital gains arising on disposals of these investments will be tax free; and income tax relief will be available at 30 per cent of the amount invested.
The new rules came into effect from 6 April 2014 and draft guidance was published on 27 March. The aim of the relief is to boost investment in philanthropic ventures, providing much-needed financial support to eligible organisations, and provide a useful tax saving for the donor.
Despite the government’s agenda firmly encouraging social investment and with the social investment market growing apace, the general reaction to the new tax relief reveals a real lack of understanding among advisers as to what social investment is and how it is relevant to their clients.
In particular, advisers are questioning whether social investment is the future of philanthropy or whether the traditional model of no-strings attached giving is still the optimum way to support charities.
So, first thing first, what is social investment? The City of London defines social investment as ‘the provision and use of capital with the aim of generating social as well as financial returns’. Where traditional philanthropy relies chiefly on individuals, foundations and corporate philanthropy programmes, social investment engages commercial banks, pension funds, insurance companies and advisors, providing products designed with both the key considerations of the investor and investee enterprises in mind.
Read more on social investment from Spear’s
Some products directly link the social impact generated with the returns that are offered to investors. For example, in 2010 Social Finance launched the first Social Impact Bond, with investors financing a range of interventions designed to prevent re-offending among a group of short-sentence prisoners.
The Ministry of Justice published preliminary figures from the project’s first year which showed a 20 per cent reduction in the frequency of re-convictions compared to the national average, indicating that the interventions were having some effect on the rates of recidivism in the area. Although it has yet to be announced whether investors will receive a return, Social Finance have been inundated with investors showing interest in the scheme.
There are now an increasing number of social investment funds and related intermediary platforms, highlighting the growing demand for this type of investment. For example, ahead of the G8 summit last summer, David Cameron announced the launch of the Social Stock Exchange: a new online information platform showcasing publicly listed social impact businesses.
The social investment industry is dynamic and potentially lucrative, with social investments seemingly sitting happily alongside traditional charitable grants and wider investment portfolios. However, the social investment market is still relatively embryonic, with the risks applying to specific social investment opportunities uncertain and perhaps somewhat difficult to assess. Still, it may now be possible, when investing, to do well and to do good at the same time.
Hannah Blakey works at boutique private wealth law firm Maurice Turnor Gardner LLP