The what, why and how of Social Investment Tax Relief

The what, why and how of Social Investment Tax Relief 150 150 Purple Lime

When it comes to accounting, there are all sorts of ways you can gain government support, funding of tax relief from just going about your business – but most people do not know about them. That is not surprising, given that many businesses are mainly concerned with generating profit, but cutting down your tax liability is an important part of that process. And for that, you may need to take advantage of certain government schemes.

Today we wanted to talk about the Social Investment Tax Relief scheme. This scheme allows individuals to help social enterprises grow by offering tax relief on their investments and is a fantastic way to get some relief on your tax bills and support a good cause at the same time.

What is Social Investment Tax Relief?

Social Investment Tax Relief is another of the Government’s tax relief incentives for businesses – this one aimed at encouraging businesses and individuals to invest in social enterprises. It was first introduced in 2014 after the government consulted with numerous social enterprises, community organisations and investors about the challenges of funding for their sector. One of the measures introduced was Social Investment Tax Relief, and in 2016 30 social enterprises had already benefited significantly from the scheme.

It filled a gap for social enterprises who needed funding and allowed them to attract investors from across the board. Especially given that it significantly reduces risk for them, as they get a 30% return on their investment upfront through the tax relief. SITR gives social enterprises access to funding that can help them grow and develop long-term sustainability, while investors can gain a financial benefit and an ethical one by supporting these causes. Combined with capital gains tax relief, the Social Investment Tax Relief scheme provides a substantial incentive for investors. Not to mention the fact that they are investing in the growth of a business that will generate a positive social investment. It really is a win for everyone involved.

How does it work?

In the simplest terms, individuals and businesses making an eligible investment through Social Investment Tax Relief can deduct 30% of the cost of their investment from their Income Tax Liability, either for the tax year the investment was made in, or the previous year.

To be an eligible investment, you will need to subscribe to shares in, or lend money to a social enterprise. The investment can be made in the form of equity or debt. This is especially important since many social enterprises are structured without shares, and so investors needed other options to be able to invest. A social enterprise is defined as an organisation with a clear social purpose and mission, and can be a charity, community interest groups, community benefit societies and even groups known as ‘accredited social impact contractors’. In order for you to gain the SITR benefit, the social enterprise you choose to invest in also has to have less than 500 employees, and not more than £15 million in gross assets to qualify.

There is no minimum you can invest (unless you are investing through a fund, who may have their own minimum threshold. But there is a cap of £1 million on investment, which would equate to a £300,000 tax deduction. The only catch is this – if you want to benefit from that 30% tax relief, the investment must be held for a minimum of three years.

Why invest?

So the big question is really, why should you invest? What are the real benefits to you getting involved in investing in social enterprises in the first place, and if you do, what benefits will you see? Well, some of the main benefits include:

  • Income tax relief: 30% of the amount invested is deducted from your 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 qualifying investment, then the capital gains tax 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. sales of shares). Any interest and redemption premium on debt would be taxed as income, and so not tax-free. 
  • Social benefits: Investing in a social enterprise also comes with its own benefits, including positive press, community action, improving brand image. So if you want to generate awareness and positivity around your brand this is a good way of doing it.

At Purple Lime our job is to provide our clients with all the information they need to make an informed decision. This includes knowing all about the various ways they could claim tax relief or benefits, and how to use them to grow their own business as well as helping others. Social Investment Tax Relief is just one of the options available to business owners and can represent a significant tax saving if done correctly. If you would like to know more, please get in touch by emailing or calling us on 01249 263 333.