In recent years, there has been a steady move towards individuals wishing to invest in more responsible and sustainable ways.
Initially the focus was on ethical investment which has now become mainstream. Ethical investment is a fairly broad concept meaning different things to different people. More recently the idea of “impact investment” has come about. This is where investors target their capital at social enterprises where their money can make a measurable difference.
What is a social enterprise?
Social Enterprise UK1 define social enterprises as businesses that:
- Have a clear social and / or environmental mission set out in their governing documents.
- Generate the majority of their income through trade.
- Reinvest the majority of their profits.
- Are autonomous of the State.
- Are majority controlled in the interests of their social mission.
- Are accountable and transparent.
The reason for tax reliefs
Investing in Social enterprises is risky, so to encourage individuals to invest in regulated social enterprises and charities, the Government introduced “social investment tax relief” (SITR) in 2014. The legislation was based on the existing enterprise investment scheme (EIS) rules.
Summary of tax reliefs
Individuals making an eligible investment can deduct 30% 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. NB, the investment must be held for at least 3 years for the relief to be retained.
If individuals have chargeable capital gains in that tax year, they can also defer their capital gains tax (CGT) liability if they invest their gain in a qualifying social investment. Tax will instead be payable when the social investment is sold or redeemed. No capital gains tax is payable on any gain on the investment itself, but income tax is payable in the normal way on any dividends or interest received.
SITR is unusual among available tax reliefs because it applies to both investment in the form of debt instruments (loans and bonds) as well as shares. This is particularly useful for charities and social enterprises which are structured as companies limited by guarantee which cannot issues shares.
If you have any questions on this or any other subject, please get in touch with any of the Paradigm Norton team on 01275 370 670 or 020 7269 7960, after all, we are here to help.
SITR has many different rules covering such matters as the maximum amount an individual can invest, maximum amounts that social enterprises can raise, how quickly the funds raised need to be spent, what funds raised cannot be used for (excluded activities,) etc.
How tax reliefs are claimed
To claim the tax reliefs, the social enterprise needs to apply to HMRC for approval. When successful and an investment is made the company will issue a form SITR3 to the investor to make the claim for tax relief from HM Revenue & Customs. There are an increasing number of SITR funds being established. Investing via this route can reduce risk by diversifying an investment around several social enterprises. SITR Funds also help with administration, such as issue of SITR3 forms, etc.
This article is for educational purposes and should not be considered as advice. Every care has been taken to ensure that this information is correct and in accordance with our understanding of current HM Revenue & Customs practice. The tax treatment depends on individual circumstances of each client and may be subject to change in the future. Enterprise investments schemes and social enterprise investments place your capital at risk. The value of investments can fluctuate and cannot be guaranteed. Tax planning is not regulated by the Financial Conduct Authority.