In the Autumn Statement 2014, the Chancellor announced that investment in or qualifying loans to social enterprises would attract tax relief. In this note we compare the tax relief offered with that already offered on SEISs, VCTs and EISs and discuss potential investment strategies in social enterprises.
A social enterprise is defined as a community interest company, a community benefit society or a charity.
Whilst tax reliefs may make an investment more attractive, we should not let ‘the tax tail wag the investment dog’.
Comparing tax relief
| SEIS | VCT | EIS | SITR | |
|---|---|---|---|---|
| Maximum Investable Per Year | £100,000 | £200,000 | £1,000,000 | £1,000,000 |
| Maximum Company Size | 25 employees | 250 employees per company | 250 employees | 500 employees |
| Maximum Company Assets | £200,000 | £15,000,000 per company | £15,000,000 | £15,000,000 |
| Income Tax Relief | Income tax liability for that year reduced by 50% of the value of the qualifying investment | Income tax liability for that year reduced by 30% of the value of the qualifying investment | Income tax liability for that year reduced by 30% of the value of the qualifying investment | Income tax liability for that year reduced by 30% of the value of the qualifying investment |
| Capital Gains Tax Disposal | Gains on the investment itself do not attract capital gains tax | Gains on the investment itself do not attract capital gains tax | Gains on the investment itself do not attract capital gains tax | Gains on the investment itself do not attract capital gains tax |
| Capital Gains Tax Hold Over Relief | Capital gains tax liabilities can be held over if the proceeds of the sale attracting the liability are invested in a qualifying enterprise | Capital gains tax liabilities can be held over if the proceeds of the sale attracting the liability are invested in a qualifying enterprise | ||
| Loss Relief | Losses can be used to reduce income tax liability in the year they are realised | Losses can be used to reduce income tax liability in the year they are realised |
All these schemes offer attractive tax benefits. However, it should be noted that EIS and SITR allow for larger amounts to be invested and so allow for greater amounts of tax to be offset against these investments. Further, VCT investments do not allow the capital gains to be held over, whilst EIS and SITR do benefit from this option, giving greater flexibility in managing tax affairs.
These schemes are not mutually exclusive. Individuals can claim tax relief under all four schemes in the full amount in each tax year. Of course, no single investment can be ‘double counted’ under more than one scheme.
Investment Offerings Involving SITR
The benefits for ethical investors include:
– The tax relief already discussed.
– The support for companies which (broadly speaking) do good in society.
– A reduced cost of the investment because of the relief and thus improve the chance of good returns (while of course accepting a higher risk).
SITR is also likely to be attractive to those with large tax bills as SITR offers the chance to significantly reduce tax liabilities beyond the reliefs already available.
Risks
– Liquidity may be lower for social investments than for general investments.
– The investments are and will be in organisations whose securities are not publicly traded or freely marketable and may, therefore, be difficult to realize and more volatile than the securities of larger, longer established businesses.
Conclusion
As always, there is the opportunity to seek for good investment returns for all clients by investing in the right qualifying investments. However, given the nature of this scheme, qualifying investments may be particularly attractive to ethically-minded investors. Each investment should be evaluated for client suitability on a stand-alone basis.
Risk warnings
This document has been prepared based on our understanding of current UK law and HM Revenue and Customs practice, both of which may be the subject of change in the future. The opinions expressed herein are those of Cantab Asset Management Ltd and should not be construed as investment advice. Cantab Asset Management Ltd is authorised and regulated by the Financial Conduct Authority. As with all equity-based and bond-based investments, the value and the income therefrom can fall as well as rise and you may not get back all the money that you invested. The value of overseas securities will be influenced by the exchange rate used to convert these to sterling. Investments in stocks and shares should therefore be viewed as a medium to long-term investment. Past performance is not a guide to the future. It is important to note that in selecting ESG investments, a screening out process has taken place which eliminates many investments potentially providing good financial returns. By reducing the universe of possible investments, the investment performance of ESG portfolios might be less than that potentially produced by selecting from the larger unscreened universe.
