Social Investment Tax Relief (SITR)
Introduced in 2014, and expanded in 2017, Social Investment Tax Relief (SITR) allows individuals to help social enterprises grow by offering a tax relief on investments.
Under SITR an individual can subscribe for shares in, or lend money to, a social enterprise and claim 30% income tax relief. If, for example, an investor lends £1,000 to a social enterprise, the real cost to the investor is only £700. But the social enterprise receives £1,000 of much needed funding to help it grow in a sustainable manner and achieve more positive social impact.
Charities, community interest companies, certain kinds of community benefit societies and so-called “accredited social impact contractors”1 qualify as “social enterprises” for the purposes of SITR. Social enterprises that have been generating sales revenues for less than 7 years can raise up to £1.5m under SITR. Older enterprises can raise up to around £280k-£290K2.
Here are the tax reliefs that an investor, under SITR, may enjoy:
- Income Tax Relief – 30% of the amount invested is deducted from the investor’s income tax liability for the year in which the investment is made.
- Capital Gains Tax Deferral – if a chargeable gain is re-invested into a SITR-qualifying investment, the CGT liability on that gain is deferred until the SITR investment is disposed of.
- Tax Free Gains – gains made on disposal are free of capital gains tax. But this only applies to capital gains – e.g. on sales of shares. Interest and redemption premium on debt would be taxed as income and are therefore not tax free.
Investments in shares may qualify for exemption from inheritance tax if they have been held for at least two years before death. Investments by way of loans will not, however, qualify for any exemption from IHT.
Investments in shares may qualify for loss relief against income or capital gains tax, but debt will not qualify for loss relief against income tax and only qualifies for relief against capital gains in certain circumstances.
Investors looking to make investments under SITR may invest in individual social enterprises, or via a SITR “fund”. SITR funds work in exactly the same way as an unapproved EIS fund, namely:
- Each investor signs some form of investment management agreement which gives a mandate to the fund manager to invest the investor’s money into social enterprises eligible for SITR.
- Investors’ monies are invested over a period of time (usually spanning two or three tax years).
- Each time a SITR-qualifying investment is made by the fund, each investor is allocated a proportion of the investment and tax relief is then claimed on that investment.
- The investment is typically held in the name of a nominee on behalf of each of the investors in the fund.
- Unlike EIS, there is no concept of an “approved” SITR fund. Tax relief can only therefore be claimed as and when qualifying investments are made via the fund – there is no tax relief when an investor initially commits monies to the fund. However, an investor may be able to carry back an investment to the previous tax year in order to accelerate the claim for income tax relief.
The Chancellor’s decision in the Spring Budget to extend SITR until April 2023 means that the immediate prospect of losing it altogether has been avoided for the time being. The two-year extension has been welcomed by many as a positive step. Big Society Capital, along with Social Enterprise UK, Resonance and Co-ops UK, had campaigned to retain and develop SITR. It still has significant potential to stimulate investment in charities and social enterprises, providing much-needed, affordable investment to these organisations. The extension does, however, beg the question of the kind of reforms currently needed to enable SITR to achieve its full potential. Now that a decision about SITR has been made, there is the possibility that it may result in adjustments to the scheme to render it more beneficial such as:
- Allowing a wider range of charities and social enterprises to be eligible by removing the restrictions that exclude larger charities.
- Allowing a wider range of activities by extending the accreditation scheme for nursing and care homes to cover other excluded activities.
- Taking advantage of the opportunities offered by the post-Brexit landscape (the government is currently consulting on a replacement state aid regime, offering the hope that SITR may have greater flexibility in the future).
1 Newly-incorporated private companies that enter into social impact contracts and are accredited by DCMS.
2 The exact cap is calculated by reference to the exchange rate with the Euro, and the highest UK rate of capital gains tax and will therefore fluctuate.