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Social investment tax relief (SITR)

Over the years we have seen a number of tax breaks for investors in business start up schemes. With effect from 6 April 2014, the government has now introduced a scheme to specifically encourage investment in social enterprises. There are tax benefits for the investor and these are collectively known as Social Investment Tax Relief (SITR).

Social enterprises are businesses which have principally social objectives. They can trade in a variety of sectors, such as healthcare, employment and sport and leisure. Such businesses may come in the form of community interest companies, community benefit societies, charities or other entities approved by the Treasury. In order to qualify as a social enterprise for SITR, the entity must have been
approved by HMRC.

There are a number of criteria for the social enterprise and the investor to meet before SITR is given. While individual investors can invest a maximum of £1,000,000 each year, the social enterprise can at present only receive roughly £286,000 in a three-year period. If full advantage of the annual SITR limit is to be taken, the investment must therefore be spread across a number of enterprises.

The SITR consists of three elements; Income Tax Relief, Capital Gains Tax (CGT) Holdover Relief and CGT
Disposal Relief.

The income tax relief comes in the form of a tax deduction of 30% of the invested amount (up to annual maximum of £1,000,000). This deduction can be used to reduce an income tax liability to nil, but it cannot generate a repayment. The deduction can also be carried back to the previous tax year, but the carry-back is not available for 2013/14 tax year. If the investment is not held for a minimum of three years, or if it ceases to be a qualifying investment, some or all of the income tax relief may be clawed back.

The CGT holdover relief allows the deferral of paying CGT on chargeable gains up to the qualifying amount invested in the year. The qualifying investment must be made between one year before up to three years after the gain was realised. The deferred gain will become chargeable when the social enterprise investment is disposed of or when it ceases to meet the relevant requirements.

Provided that the social enterprise investment is owned for more than three years and the Income Tax Relief given has not been clawed back, any gain realised will not be subject to CGT.  If the investment is sold at a loss, income tax relief may be available, although this will be reduced by the income tax relief already given.

The investment can be in the form of both shares or debt. Any dividends and interest received from the investments are, however subject to income tax as normal.

It is anticipated that this relief will appeal to business investors in this sector.

 

 

Date: 9th September, 2014
Author: Jack Reyland

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