Social Investment Tax Relief (SITR) is a relatively new tax incentive for individuals investing into social enterprises. Under SITR, individuals can claim back 30% of their investment from HMRC. See our factsheet for professional advisers below.
SITR: an overview
Introduced in 2014, and expanded in 2017, SITR allows individuals to help social enterprises grow by offering a tax relief on investments.
Under SITR, an individual can subscribe for shares in, or lend money to, a social enterprise and claim 30% income tax relief. So, for example, if an investor lends £1,000 to a social enterprise, the real cost to the investor is only £700. But the social enterprise receives £1,000 of much needed funding to help it grow, become more financially secure and achieve more positive social impact.
Charities, community interest companies, certain kinds of community benefit societies and so-called “accredited social impact contractors”1 qualify as “social enterprises” for the purposes of SITR.
Social enterprises that have been generating sales revenues for less than 7 years can raise up to £1.5m under SITR. Older enterprises can raise up to around £280k-£290K2.
Income Tax Relief
30% of the amount invested is deducted from the investor’s 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 SITR-qualifying investment, the Capital Gains Tax (CGT) 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. on sales of shares. Interest and redemption premium on debt would be taxed as income, so are not tax free.
Inheritance Tax Relief
Investments in shares may qualify for exemption from inheritance tax if they are held at time of death and have been held for at least two years. Investments by way of loans will not qualify for any exemption from inheritance tax.
Investments in shares may qualify for loss relief against income or capital gains tax, but debt will not qualify for loss relief against income tax and only qualifies for relief against capital gains in certain circumstances.
Investors looking to make investments under SITR may invest in individual social enterprises directly with an organisation (including via a crowdfunding platform) or via a SITR “fund”.
SITR funds work in exactly the same way as an unapproved EIS fund, namely:
- Each investor signs some form of investment management agreement which gives a mandate to the fund manager to invest the investor’s money into social enterprises eligible for SITR.
- Investors’ monies are invested over a period of time (usually spanning two or three tax years).
- Each time a SITR-qualifying investment is made by the fund, each investor is allocated a proportion of the investment and tax relief is then claimed on that investment.
- The investment is typically held in the name of a nominee on behalf of each of the investors in the fund.
Unlike EIS, there is no concept of an “approved” SITR fund. So tax relief can only be claimed as and when qualifying investments are made via the fund – there is no tax relief when an investor initially commits monies to the fund. However, an investor may be able to carry back an investment to the previous tax year in order to accelerate the claim for income tax relief.
The following table sets out where the SITR sits in comparison to other tax efficient investments into businesses (SEIS, EIS and VCT), by way of illustration. Please bear in mind these will depend on individual circumstances.
* SEIS reinvestment relief exempts half of the gain reinvested up to the SEIS maximum investment of £100K (i.e for a gain of £100k reinvested in an SEIS investment, £50k of the reinvested gain is exempt.)
You can also download the factsheet