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Tax payback for social investment - the new Social Investment Tax Relief

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The United Kingdom's social sector has seen huge progress in the last ten years with financial support from private sources.  Businesses with social objectives are performing well. However, finance for the market is needed to maintain the level of growth.  The introduction of the Social Investment Tax Relief in April 2014 has made social investment more accessible and social enterprises can increase their reach and impact by attracting more investment into the community.  Eligible investments include charities, community benefit societies and community interest companies.

Examples include Higher Education Institutions and organisations whose social purpose is already regulated and monitored.  Some activities will be excluded from the relief including property development, dealing in land, shares, futures and commodities.  Banking, insurance and money - lending will also be excluding unless the funds in question are lent to Charities.

Tax relief is available to individuals who invest in qualifying social organisations.  30% of their investment is returned to the taxpayer by reducing their income tax liability for the tax year.  The 30% rate is the same as the company investment tax relief know as 'Enterprise Investment Scheme' and has similar capital gains tax deferral relief subject to conditions.  Provided the qualifying conditions are met by the individual and the social enterprise, the relief will not be withdrawn by HM Revenue & Customs.

There are rules about the closeness of an investor's relationship with the social enterprise, generally an individual should not be a partner, trustee, employee or own more than 30% of the capital during the period from one year before the investment to the third anniversary of the investment. The relief may be claimed if the investment is in shares or when funds are lent to the social enterprise.

There are separate conditions which the social enterprise is required to meet.  A Compliance Certificate is then issued in respect of the investment which allows the investor to make a claim. There is no minimum investment, the maximum which qualifies for tax relief is £1 million and a claim can be made up to five years after 31 January following the tax year that the investment is made.  Income tax relief may be claimed if you hold the investment for at least three years from the date of issue.  Capital gains may also be deferred if qualifying investments are made, you have had income tax relief and you dispose of the investment after holding it for at least three years, any gain you make on the investment is free from capital gains tax.

This should provide an incentive to investors to invest in regulated social enterprises as previously small social enterprises were disadvantaged in terms of tax relief.  There was a disparity between small businesses and small social enterprises as one had tax relief for investment and one did not, now the treatment is equal.  For many social entrepreneurs, this is a welcome move by the government to encourage growth.

As with all such tax situations, advice should also be sought before proceeding.  For further details call Alan Boby on 01295 250401 or email aboby@ellacotts.co.uk

Alan Boby

Ellacotts LLP"

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