Investments in qualifying social enterprise companies are similar to EIS, VCT and SEIS investments and are eligible for similar tax reliefs. The relief was due to come to an end in April 2021. In the 2021 Budget, it was announced that this is extended until April 2023.
If you invest in shares or certain bonds issued by a social enterprise before 5 April 2023 you can claim income tax relief of 30% of the amount invested up to a maximum investment of £1m per tax year. Therefore, the maximum relief for 2020/21 and 2021/22 is £300,000.
A social enterprise is a community interest company, a community benefit society or a charity. They will run a business or trade primarily for the benefit of the community. Some examples of these include environmental initiatives such as recycling companies and upcycling and business that help regenerate the high street, reduce isolation, and help people into work through training. There are directories at socialenterprise.scot for a list of social enterprises in Scotland, and for the wider UK investments at socialenterprisemark.org.uk.
Similar to both EIS, VCT and SEIS, there are certain conditions that must be met to qualify for income tax relief:
- You must not own more than 30% of the social enterprise’s ordinary share capital, loan capital or voting rights.
- Associates’ holdings will be taken into account towards the 30% limit.
- You cannot be an employee or paid director.
- The investment must be held for three years (where less, the income tax relief can be withdrawn)
This income tax relief is given as a tax reducer. To gain the full income tax benefit from the investment you must have an income tax liability for the year of investment equal to or greater than the SI relief. You can elect to treat the qualifying investment as if it were made in the immediately preceding tax year, as long as the maximum investment for the earlier year has not been reached.
In addition to the income tax reliefs, capital gains tax reinvestment relief:
- Available for investments acquired in the period starting one year before the disposal and ending three years after the date of the disposal
- the reinvestment must be made before 6 April 2023
- The reinvestment relief is only available if the investment qualifies for income tax relief.
A gain deferred in this way falls back into the charge to capital gains tax when you dispose of the social enterprise investment (other than to your spouse or civil partner) or the conditions for income tax relief on the investment are broken.
Where income tax relief on the investment is claimed, gains arising on the investment are exempt from capital gains tax so long as the investment is held for at least three years. If a loss is made on disposal of the social enterprise investment, that loss is an allowable loss for capital gains tax purposes, although the amount of the loss must be reduced by any income tax relief given which has not been withdrawn. This means there are significant additional tax savings that can be claimed if a loss is made on the investment.
You can claim SITR via your self-assessment tax return, however, a claim can be made out with this up to five years after the end of the tax year of investment. Investments can be made in any number of different social enterprises but will only receive tax relief on investments up to the maximum of £1m per tax year. Investments above this limit are allowed, however, they will not qualify for relief.
Investments can also be made in EIS, SEIS and VCT schemes, these schemes have their own annual investment allowances and the £1m SITR investment allowance is independent from these. When making investments that qualify for relief, it is important to consider the maximum relief available based on the income tax liability in both the year of investment and the preceding year. Relief will be wasted if it exceeds the liability due for the year. You will also need to consider any SITR investments made in the preceding year for both offsetting the relief against the liability and the investment threshold.
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