SITR Social Investment Tax Relief explained

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SITR Social Investment Tax Relief explained

Social investment tax relief “SITR” is a newish tax relief similar to the Enterprise Investment Scheme (EIS) tax regime. It offers income tax and capital gains tax reliefs to social enterprise investors.  Investors in commercial trading companies have EIS tax reliefs. Investors in social enterprises have SITR reliefs.

Unlike EIS investments which must be in shares, social enterprise investments can be shares and/or loans. We explain the complex rules and regulations below.

We support both investors and social enterprises. We set up appropriate share structures and trading arrangements, to create the best chance of fund raising and future success.

Social investment tax relief: tax benefits

Investors’ tax savings under SITR comprise:

Income tax relief

On their social enterprise investment, investors can claim:

  • Tax relief of 30% of the amount invested (up to annual maximum of £1 million);
  • Tax relief can also be carried back, to be claimed for the previous tax year.

Capital-gains tax hold-over relief

Investors can defer a capital-gain tax liability payment, if they re-invest an amount equal to the gain in a social enterprise. This investment must occur either one year before, or within three years after, the date when the capital gain arose.

The original capital gain can arise from any type of asset. However, the gain must have been made between 6 April 2014 and 5 April 2019. Note, the investor will pay capital gain tax, if:

  • The investor sells the social enterprise investment;
  • The social enterprise no longer meets the requirements described below.

Capital gains tax disposal relief

HMRC main conditions for capital-gains tax exemption on the social enterprise investment are:

  • The investor must have held the investment for a minimum of three years; and
  • Income tax secured on investment must not have been clawed back.

Tax relief example

Fred sells shares, and makes a capital gain of £72,000. He then invests £30,000 in a qualifying social enterprise, within the time limits.

Fred can claim £30,000 of capital gains tax is deferred, until he sells his social enterprise investment.

However, Fred still has a chargeable gain of £42,000, i.e £72,000 less £30,000, on which he will be subject to capital gains tax.

Qualifying social enterprises

Social enterprises are businesses with a primary social objective. They trade in a variety of sectors, including sport and leisure. Social enterprises include community interest companies and charities.

Social enterprises combine business know-how with social purpose. Ideally, they develop innovative solutions to social problems, e.g.

  • Homelessness;
  • High re-offending rates;
  • Environmental issues.

Social investment tax relief restrictions

HMRC restricts the type of investment that qualifies for SITR. Restrictions include:

  • All money raised must be used for the social enterprise’s purposes and within 28 months of the investment date;
  • Investors cannot secure an “unfair advantage”;
  • Investors may not control over 30% of the social enterprise.

Confusingly, an individual can claim relief on a maximum SITR investment of £1 million per tax year. However, a social enterprise can only receive a maximum investment over three years of approximately £286,000.  The exact figure depends on the £/€ exchange rate.  So the social enterprise’s investment cap is far lower than the SITR cap.

You have to ask HMRC if the social enterprise qualifies for your SITR investment. HMRC check that the social enterprise continues to qualify during the investment. In addition, the social enterprise must send HMRC a completed SITR compliance statement.