What is Social Investment Tax Relief and is it a good option for you?

By Anita Jaynes on 7 December, 2021

Sponsored by Purple Lime

We all want to do good in the world. To leave it a slightly better place and make our mark in some way. If you’re a business owner, you probably want to do that while making sure your business is as successful as it can be. The good news is, there is a way to tick both boxes. The governments Social Investment Tax Relief scheme is designed to give individuals and businesses an incentive to invest in social enterprises that are doing good in the world, by way of a big tax relief. So, if you’re looking for ways to cut your income tax liability and do some good in the world, this might be a great option for you.

What is Social Investment Tax Relief?

In 2014 the UK government brought in something called the Social Investment Tax Relief scheme, or SITR for short. This scheme was the result of years of work and collaboration with various social enterprises, community organisations and investors about the challenges of attracting funding for social enterprises, and the need for investment in this kind of organisation to help them grow. In just 2 years over 30 organisations had benefited significantly from the scheme, including FC United of Manchester and FareShare South West.

The scheme was expanded in 2017 while still offering investors a 30% tax relief on any investment made into an eligible social enterprise. This has proven to be an incredibly attractive incentive for many investors and has helped provide access to funding for social enterprises that wouldn’t otherwise be able to benefit. These funds can then be used to fuel growth and develop sustainability, all while contributing towards their greater social mission.

How does Social Investment Tax Relief work?

Simply put, if a business or individual invests money into an eligible social enterprise through SITR, then they can deduct 30% of the cost of their investment from their income tax liability, either that year or the year previous. The key term there is ‘eligible investment’, as not just any investment, or just any social enterprise will work for this scheme. 

From an investor’s point of view, you will need to subscribe to shares in, or lend money to a social enterprise, in the form of either equity or debt. This was one of the changes brought in in 2017, as many social enterprises aren’t structured with a share system, so there needed to be a different way for investors 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 to be eligible for SITR, the social enterprise you choose to invest in needs to have less than 500 total employees, and not have any more than £15 million in gross assets. 

You can basically invest as much as you like into your chosen social enterprise. There is no legal minimum (though if you are using a third-party fund then they may have their own investment threshold), but there is a legal maximum of £1 million. To put this in perspective, if you were to invest £1 million into an eligible social enterprise, you would be able to deduct £300,00 from your income tax liability. However, if you want that 30%, then the investment must be held for a minimum of three years to qualify.

What are the benefits to investing?

If you are considering investing as part of your personal or business strategy, then investing in a social enterprise is a good way to go. Not only are you contributing something positive to the world and supporting organisations in their social missions, but you can also reap a few benefits for yourself as well. Some of the big reasons people and businesses choose to invest in social enterprises 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.

When it comes to understanding tax relief options, our team are some of the best. We are dedicated accountants and bookkeepers with a deep understanding of the possibilities for businesses and individuals, and we work with our clients to find the right strategy for them. We see it as our job to ensure you know all of the routes forward for your business, including things like investing in a social enterprise to gain some tax advantages. If you would like to know more, please get in touch by emailing hello@purplelime.uk.com or calling us on 01249 691360.

To find out more about Purple Lime visit: www.purplelime.uk.com