The tax breaks for investing in social enterprises is set to end on 5 April 2023. What are the tax savings, is it worth rushing to make a qualifying investment or might an alternative scheme be better for you?
Social investment tax relief (SITR) was introduced to encourage private investors to put money into “social enterprises” (SEs), which are organisations whose objectives are to benefit the community or environment. To be able to raise funds that qualify for SITR, the SE must be a:
- community interest company (CIC)
- community benefit society, with an asset lock; or
- charity, which can be a company or a trust.
- SEs must meet further conditions to attract investments that qualify for SITR (see The next step ).
Tax breaks
SITR is similar to the enterprise investment scheme (EIS), which charities and CICs are unlikely to qualify for. The headline tax break is the ability to take a sum equal to 30% of the amount you invest off your income tax bill, subject to an investment cap of £1 million. You must hold the investment for at least three years or the relief can be withdrawn.
Tip. Unlike under the EIS, you can also make an unsecured loan to a qualifying SE and claim relief. An advantage of this is that the SE can then pay you a return on the capital. A share investment into an SE is unlikely to yield dividends.
Tip. It also means you don’t need to find a buyer for the shares when you want to exit later on, the SE simply repays you.
Example. Bill lends £10,000 to an SE that provides disadvantaged children with days out. Bill can claim £3,000 in income tax relief, and the loan can be repaid to him after three years. The SE can pay Bill interest on the balance at a commercial rate.
Tip. The tax relief and return on capital work to reduce the cash risk to the investor if the loan is never repaid.
Use it or lose it
As things stand, SITR will close on 5 April 2023. Unless it is extended in the Budget on 15 March 2023, any investments must be made before that date. If you’re keen to make a tax- efficient investment before the closing date, SITR is an option but it might not be right for you and there are others worth considering.
Investor priorities
If you are solely looking to save tax and want to minimise risk, you will probably be better off looking for a venture capital trust. This also offers a 30% income tax reduction, but spreads the investment across a number of companies, hedging your risk. SITR is more likely to appeal to you if you feel strongly about social or environmental issues, particularly if you were considering making a donation to an SE with gift aid anyway. To find a qualifying SE looking for investors, look for crowd funding platforms to find a SITR fund. You can also check your local area for registered CICs or speak to your accountant.
Tip. If you use a fund, remember the key date will be the one the SE receives the money, not the date you pay it into the fund. Ask for clarification that this will be before 5 April.
Buying an equity share in, or making a loan to, a qualifying social enterprise qualifies you for income tax relief equal to 30% of your capital. However, consider alternatives, e.g. a venture capital trust, if you are looking for a more commercial investment with equivalent tax relief.
This article has been reproduced by kind permission of Indicator – FL Memo Ltd. For details of their tax-saving products please visit www.indicator-flm.co.uk or call 01233 653500.