SITR is a tax relief for individuals who invest in social enterprises. For this purpose social enterprises are community interest companies, community benefit societies or charities. It applies for qualifying investments from 6 April 2014.
Qualifying investors who subscribe for new shares (or certain debt instruments) issued by qualifying social enterprises can claim to reduce their income tax liability by an amount equal to 30% of the amount of the social investment.
Where income tax relief is available on shares, any gains on them will be exempt on disposal.
The investor may also defer capital gains reinvested in a social investment so the gains are chargeable only when the social investment is sold and, even then, could be reinvested in another SITR, Enterprise Investment Scheme (EIS) or Seed Enterprise Investment Scheme (SEIS) qualifying investment.
The mechanics of the relief resemble those of the existing EIS and they share many of the same, complex, conditions.
The main conditions include that the investor:
The intention of the scheme is to attract risk capital, so if the investee enterprise is issuing debt the investment must be unsecured and subordinated with no more than a reasonable rate of return.
The qualifying Social Enterprise must carry on a trade and certain trades are not allowed. SITR is unlikely to assist community renewable projects as one exclusion is generating electricity on which Feed in Tariffs are received.
How it compares with SEIS and EIS
In many situations, a social enterprise may be able to qualify for either SITR or the existing EIS and SEIS.
SEIS offers higher income tax relief and exempts from tax 50% of capital gains reinvested. It only applies to shares in small companies which have commenced activities in the previous two years and the maximum claim per individual and company under SEIS is the lowest level of the three schemes.
SITR and EIS offer similar levels of relief. However SITR can apply to debt or shares whereas EIS only applies to shares.
Currently the limit on SITR per organisation is very low due to European rules but the Government is seeking approval to raise this. Until then the relief might not get the wide-scale take up desired.
|Maximum investment per individual||£1million||£100,000||£1million|
|Income tax relief||30%||50%||30%|
|Capital gains tax free (1)||Yes||Yes||Yes|
|CGT deferral (2)||Yes||No||Yes|
|CGT relief (3)||No||50%||No|
|Minimum holding period||3 years||3 years||3 years|
|Maximum per investee entity||€344,827
over 3 years
|£150,000||£5million in any 12 months|
|Unique benefit||Can apply to debt instruments as well as shares||Highest rate of relief and CGT holiday||Highest investment limit|
Notes to the above:
1. The growth in the value of the investment is free of CGT provided it has been held for the minimum holding period.
2. Gains on the disposal of any asset can be deferred into these investments.
3. Instead of CGT deferral, a relief is available for 50% of gains on the disposal of any asset invested in qualifying SEIS.
SITR is a welcome new relief which should assist CICs in raising finance.
Choosing to base it so closely on the existing EIS has unfortunately meant the same level of complexity for those who chose to make use of it. It also puts it ‘toe to toe’ with the SEIS which, for new start-ups, could offer more generous relief.
Attached is a fantastic guide to using SITR from Matt @FreedomBakeryCIC