Social Investment Tax Relief (SITR) – incentivising investors in social enterprises

Having already increased the limit on the amount of Social Investment Tax Relief (SITR) qualifying investment that an eligible social enterprise can receive, the Government now looks set to promote ‘social impact investing’ to a much wider audience.

In response to last year’s Advisory Group Report on growing the social impact investment market, in June 2018 the Government welcomed its 53 recommendations and committed to working with the investment industry to support the launch of more investment funds that have a specific social or environmental purpose. It has already confirmed that it will review SITR in 2019.

What is Social Investment Tax Relief (SITR)?

Social Investment Tax Relief (SITR), introduced from 6 April 2014, is the Government’s tax relief for social investment, designed to encourage individuals and investors to support social enterprises and community interest companies while providing a new source of finance for organisations with a social purpose.

What are the benefits for investors?

SITR enables individuals making an eligible investment to 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 (if 2014/15 or later).

If individuals have chargeable 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. They also pay no CGT on any gain on the investment itself, but they must pay income tax in the normal way on any dividends or interest on the investment.

The investment must be held for a minimum period of three years for the relief to be retained, and the maximum annual investment which qualifies for SITR is capped at £1m per investor.

Changing workplace culture


What are the benefits of Social Investment Tax Relief for social enterprises?

According to social investment advocates Big Society Capital, the average amount of capital raised by social enterprises through SITR deals over the first two years of the initiative was £100,000, although these deals were struck under the original cap of £293,000 per social enterprises during any three-year rolling time period. That limit was raised to £1.5m last year, and some commentators expect the limit to be increased further to attract more fund managers.

The social enterprise doesn’t need to start paying the investment back for at least three years, which is particularly appealing to start-up enterprises that will then have time to get business plans in place and start generating income.

The organisations should also benefit from investment at a lower interest rate than they would secure from banks or other financial institutions, reflecting the tax incentive SITR offers to investors. Research by Big Society Capital found that the average cost of capital for deals during the first two years was 4.8% pa over a five-year period.

It also found that while the average size of investment was around £20,000, some investments in community share offers have been as low as £230, highlighting the range of investor types to which the SITR appeals.

What conditions are in place?

As well as raising the lifetime SITR qualifying investment that an eligible social enterprise can receive to £1.5m, HMRC also introduced some new conditions for social enterprises last year. These include:

  • The higher SITR limit will only be available to social enterprises established for less than seven years; the original limit will remain for older organisations.
  • For a social enterprise to be eligible for SITR qualifying investment, it will need to have a minimum of 250 full-time employees (previously 500).
  • The social enterprise must not be in financial difficulties at the time the investment is made, and SITR-qualified investment cannot be used to refinance existing debt obligations.
  • A number of trades are no longer eligible, including managing and operating nursing homes and residential care homes, generating electricity or heat, or hiring out assets (which could impact on organisations such as community sports halls or community pubs).

Investors will also be ineligible to receive SITR if they already hold shares or bonds issued by the social enterprise (although some qualifying factors apply). The time limit for investments was also extended, to April 6, 2021.

Although the SITR initiative is still relatively small, it’s clear the Government is viewing the scheme as one which could attract significant interest in the future, so it will be interesting to see if further incentives are added to encourage greater numbers of investors.

This post was written by Price Bailey Charities Partner, Helena Wilkinson. If you need further information on any of the above please feel free to get in touch with Helena using the contact form below.

We always recommend that you seek advice from a suitably qualified adviser before taking any action. The information in this article only serves as a guide and no responsibility for loss occasioned by any person acting or refraining from action as a result of this material can be accepted by the authors or the firm.


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