Social Investment Tax Relief

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In our previous article, we investigated some of the objectives of Social Impact Investing. In addition to offering investors the opportunity to address social needs at the same time as generating a return on investment, the Government also offers social investment tax relief, or SITR, to encourage individuals to invest in, and support, socially-focused enterprises.

The key benefit of SITR is that individual investors can deduct up to 30% of the cost of their investment in an eligible enterprise from their income tax liability, either in the year the investment was made or the previous tax year (if after April 2014), as long as the investment is held for a minimum of three years.

How the schemes compare for Income Tax relief

Scheme   Maximum annual investment you can claim relief on Percentage of investment on which you can claim Tax relief on income from dividends
EIS £1 million
£2 million if at least £1 million of that is invested in knowledge-intensive companies
30% No
SEIS £100,000 50% No
SITR £1 million 30% No
VCT £200,000 30% Yes

As shown above, individual investors can invest up to £1 million in Social Impact Investments however, this would need to be spread across more than one enterprise as, under EU rules, individual enterprises can only receive up to €344,827 per annum (about £250,000, or the equivalent amount at the exact exchange rate on the date of investment) over the three years. Any investments in social enterprises are independent of SEIS or EIS, which are subject to their own limits.

Investors can also defer any payable Capital Gains Tax (CGT) that may be due in the current tax year by investing their gains into an eligible social enterprise; this means the tax will instead be payable when the investment is redeemed or sold, the company stops meeting the scheme conditions or you become non-resident. Whilst no CGT is payable on the investment itself, income on any dividends or interest remains taxable.

How the schemes compare for Capital Gains Tax relief

Scheme   Personal Capital Gains Tax relief available on your initial investment Type of Capital Gains Tax relief on initial investment Exempt from Capital Gains Tax when you sell shares Relief available for capital losses against income
EIS Yes on 100% of investment Deferral Yes if you received Income Tax relief Yes
SEIS Yes on 50% of investment, capped at £50,000 Exempt from tax Yes if you received Income Tax relief Yes
SITR Yes on 100% of investment Deferral Yes if you received Income Tax relief Yes – but not on loans
VCT N/A N/A Yes No

Back in 2015, the Government also announced details of a new Social VCT scheme, which, like the existing VCT scheme, will offer investors 30% tax relief on the value of their investment but will be linked exclusively to social enterprises. The exact details are due to be legislated in a future finance bill.

If you would like to discuss SITR opportunities as part of your portfolio, please contact your Finura adviser.

Articles on this website are offered only for general informational and educational purposes. They are not offered as and do not constitute financial advice. You should not act or rely on any information contained in this website without first seeking advice from a professional.

EIS, SEIS, SITR and VCT investments are complex products, which should be considered as being higher-risk investments and are not suitable for all investors. They may be appropriate as part of a diversified portfolio, giving access to an alternative asset class, but many involve long term investments and as non-readily realisable securities therefore should be considered illiquid and unsuitable for unplanned or early capital withdrawals.

Past performance is not a guide to future performance and may not be repeated. Capital is at risk; investments and the income from them can fall as well as rise.

Sources:
https://www.gov.uk/guidance/venture-capital-schemes-tax-relief-for-investors#income-tax-relief
https://www.gov.uk/guidance/venture-capital-schemes-apply-to-use-social-investment-tax-relief#companies-that-can-use-the-scheme

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