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September 29th 2020

Social Investment Tax Relief

Social Investment Tax Relief (SITR) is a state aid designed to help you raise money to support the trading activity of your:

  • Community Interest Company.
  • Community benefit society, with an asset lock.
  • Charity, which can be a company or a trust.

SITR is available for individuals who subscribe for qualifying shares or make qualifying debt investments in a social enterprise which meets the qualifying conditions, and who have a UK tax liability against which to set the relief. Investors need not be UK resident.

Income Tax Relief

An investor is entitled to SITR of 30% of the investment made or, if less, £1m, for the tax year in which the amount was invested. An election must be made to claim all, or some, of the relief.

There is a carry-back facility which allows all or part of the amount invested in one tax year to be treated as though the investment had been made in the preceding tax year. This is subject to the overriding limit for each year.

The relief is given by means of a reduction in the individual’s income tax liability, providing there is enough tax liability which to set it.

Example:

Alex invests £150,000 in 2020-21 in qualifying shares. The SITR available is £45,000 (£150,000 x 30%). His tax liability for the year before SITR is £55,000, which can reduce to £10,000 as a result of his investment.

The investment must be held of a period of three years from the date the investment is made for relief to be retained. If it is disposed of within the three-year period, or if any of the qualifying conditions cease to be met during that period, relief will be withdrawn or reduced.

Capital Gains Tax Deferral

CGT deferral relief offers the chance to postpone a CGT liability where an investment is made in a social enterprise.

The deferral is only available for gains arising on disposals before 6 April 2021 and the reinvestment must be made within the period beginning one year before and ending three years after the disposal concerned.

To qualify for deferral relief, the investor must be UK resident at the time the CGT liability arose and at the time the investment is made.

CGT Exemption

Where an individual acquires an investment in a social enterprise to which SITR income tax relief is attributable, any gain which would otherwise arise on a disposal more than three years after its acquisition is not a chargeable gain.

Where income tax relief was restricted because the value of the investment exceeded £1,000,000, the gain is apportioned, and the CGT exemption is restricted to an amount attributable to the assets on which income tax relief was given.

Example:

Andrew invests £1.5 million in qualifying shares. He therefore obtains SITR restricted to £300,000 (£1,000,000 x 30%). Four years later he sells the shares for £2 million. The overall gain is £500,000, but the gain eligible for exemption is restricted to £333,333, by being multiplied by the fraction of £300,000 (being the SITR actually given) over the tax at the SITR rate on the total investment, £450,000 (i.e. £1,500,000 x 30%).

If you'd like to discuss any of the points in this article, contact us today.

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