Social investment tax relief

The new social investment (SI) relief, modelled on similar lines to EIS/SEIS will be available to individual investors in social enterprises from 6 April 2014 onwards. Initially, the scheme has a five year lifespan, but this may be extended.

The value of the income tax relief is not yet known and itwill not be possible to double-up with other reliefs (i.e. EIS, SEIS orCommunity Investment tax relief) apart, possibly,from the non-doms’ remittance basis business investment relief.

Qualifying investments may take the form of shares ordebentures (including simple loans) issued by the social enterprise (basicallyhigh risk investments).

  • Incometax relief will be given as a percentage of investment but the actual ratewill not be announced until the Budget on 19 March 2014.
  • SI relief securities will be exempt from CGT onthe shares/debentures themselves.
  • CGTdeferral relief will be available by matching relief on which income taxrelief is claimed with gains realised in the period beginning one year beforeand ending three years after the acquisition of the shares/debentures. Deferredgains will become chargeable when the SI shares/debentures are disposed of.
  • The maximum investment(s) on which an investorcan obtain income tax or CGT deferral relief will be £1m.

Investors will also be able to carry back some or all of theinvestment to the preceding tax year (but not 2014/15 investments to 2013/14).

Conditions similar to EIS

A social enterprise or 90% qualifying subsidiary must carryon a qualifying trade (and have done so for at least four months).  Qualifying trades and excluded activities aredefined in the same way as for EIS. There is a similar three year minimumqualifying period to EIS, running from the date of acquisition, throughoutwhich the investment must be retained and the social enterprise continue toqualify. Otherwise both the income tax and CGT relief will be withdrawn.

  • The sum of full time equivalent employees of thesocial enterprise and any qualifying subsidiaries must be fewer than 500.
  • The maximum amount which a social enterprise canraise this way over a three year rolling period must be no more than €200,000because of State Aid limits, and this money must be used within 28 months.
  • The shares or debt instruments must be newissues to the investor.
  • The shares or debt instruments must be fullypaid up at issue
  • There can be no pre-arranged exits, riskavoidance, linked loans or tax avoidance.
  • The range of individuals who cannot invest in asocial enterprise is wider than for EIS because it has to encompass not onlyemployees and directors but also trustees and partners of the social enterpriseand persons with a financial interest in the capital of the social enterpriseor 51% subsidiary of it.

Qualifying social enterprises

The biggest difference from EIS is that the socialenterprise issuing the investment does not have to be a company. It can be a:

  • community interest company;
  • community benefit society that is not a charity;
  • charity; or
  • other body prescribed, or of a descriptionprescribed, by an order made by the Treasury.

Community benefit society

A ‘community benefit society’ (CBS) broadly encompasses thewhole range of unincorporated societies constituted for community benefit. ACBS may be registered under the Co-operative and Community Benefit SocietiesAct 2014 (CCBSA).

Other bodies that may qualify are pre-existing bodies thatsatisfy the criteria in CCBSA including registered industrial or providentsocieties and credit unions.

Similar to EIS but not the same

This is a case of ‘nearly but not quite’ when itcomes to comparing SI relief with EIS (SI is nearer to EIS than SEIS). There isalso going to be a plethora of regulation surrounding eligible socialenterprises. Therefore it would be impossible to cover all of this initiativehere but it represents a potentially valuable opportunity to private investorsand social enterprises alike and we will be returning to this topic in thecoming months.