Social investment tax relief (SITR) is the government’s tax relief for social investment which encourages individuals to support social enterprises and helps them access new sources of finance.
1. How investors benefit
Individuals making an eligible investment can 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). The investment must be held for a minimum period of 3 years for the relief to be retained.
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 income tax and capital gain tax reliefs provide a substantial incentive for investors. To make sure new investment is directed to the enterprises which need it most and to meet EU regulations, the investment and the organisation receiving it must meet certain criteria.
Organisations must have a defined and regulated social purpose. Charities, community interest companies or community benefit societies carrying out a qualifying trade, with fewer than 500 employees and gross assets of no more than £15 million may be eligible.
Other conditions and criteria apply to the enterprise, investor and the investment made.
3. How enterprises apply for approval
Social enterprises will need to apply to HMRC to confirm that both they and the investment they have received meet the conditions of the scheme. Investors are only able to claim tax relief once this confirmation has been given.
Before receiving investment, the social enterprise can apply to HMRC for a preliminary opinion on whether the social enterprise and the proposed investment are likely to qualify for SITR. This optional step is called an advance assurance application.
4. Social impact bonds
Investments in companies set up to carry out a social impact bond are eligible for SITR, but only if the company has received accreditation from the Cabinet Office.
5. Maximum amount of SITR investment
Under EU rules governing the initial introduction of SITR, individual enterprises can only receive a certain amount of government subsidised investment. The limit is €344,827 (about £250,000) over 3 years. The exact sterling equivalent is the spot exchange rate on the date of investment.
Individual investors can invest up to £1,000,000 and can invest in more than one social enterprise. This is independent of any investments under the Seed Enterprise Investment Scheme and the Enterprise Investment Scheme which are subject to their own annual investment limits.
6. Social Venture Capital Trust
In Budget 2015, the government announced details of the design of a new Social Venture Capital Trust (Social VCT) scheme. The scheme will encourage investment in companies that invest in social organisations. It will be similar to the Venture Capital Trust Scheme for indirect investment in commercial companies.
Investors in a Social VCT will be eligible for income tax relief at 30% of the value of their investment, subject to EU state aid clearance of the policy. The Social VCT will be legislated in a future finance bill.
Read more about the Budget 2015 announcement on SITR.
7. Further information
Read the full HM Revenue & Customs social investment tax relief guidance.
The legislation giving effect to SITR is at schedules 11 and 12 of the Finance Act 2014, amending the Income Act 2007.
For help with SITR you can call HMRC’s Small Company Enterprise Centre on 03000 588 907 or email email@example.com.