Following a consultation last year, Finance Act 2014 introduces a new form of tax relief onto the statute books, called social investment tax relief.
The legislation is intended to encourage individuals to invest in social enterprises and obtain attractive tax reliefs in doing so.
What is a social enterprise?
Social enterprises are businesses that trade to tackle social problems, improve communities, people’s life chances, or the environment. They make their money from selling goods and services in the open market, but they reinvest their profits back into the business or the local community.
The term ‘social enterprise’ came about from recognition that in the UK and across the world, there were organisations using the power of business to bring about social and environmental change
Social enterprises should:
- have a clear social and/or environmental mission set out in their governing documents
- generate the majority of their income through trade
- reinvest the majority of their profits
- be autonomous of state
- be majority controlled in the interests of the social mission
- be accountable and transparent.
Examples of social enterprises include The Big Issue, The Eden Project and The Co-operative.
What are the new tax reliefs going to be?
The new tax reliefs will come in the form of income tax relief and capital gains tax reinvestment relief, rather like the enterprise investment scheme (EIS).
Income tax relief – individuals making an eligible investment at any time from 6 April 2014 can deduct 30% of the cost of their investment from their income tax liability for 2014/15 (or the relevant later year in which the investment is made). The minimum period of investment is three years.
Capital gains tax reliefs – if individuals have chargeable gains in 2014-15 (or a later year) they can also defer their capital gains tax (CGT) liability if they invest their gain in a qualifying social investment. Tax will instead be payable when the social investment is sold or redeemed. They also pay no CGT on any gain on the investment itself, but they must pay income tax in the normal way on any dividends or interest on the investment.
Individual investors can invest up to a total of £1,000,000 per tax and can invest in more than one social enterprise. This is independent of any investments under Seed Enterprise Investment Scheme (SEIS) and Enterprise Investment Scheme (EIS) which are subject to their own annual investment limits.
When combined, these tax reliefs can make for an attractive investment from a tax perspective:
Mrs Mills is a wealthy taxpayer who pays income and capital gains tax at the highest rates (i.e. income tax at 45% and capital gains tax at 28%).
During the year ending 5 April 2015, she makes an investment into a social enterprise of £100,000. Her total income for the year is £300,000 and she has made a capital gain, after her annual exemption, of £100,000. She elects to roll over the gain against the social enterprise investment.
The real cost of making the investment is therefore:
Cost of investment £100,000
Income tax relief (£10,000 x 30%) (30,000)
Capital gains tax held over (£100,000 x 28%) (28,000)
Cost of investment net of tax reliefs £42,000
Provided that the investment is held for at least three years, any capital gain arising on the disposal of the social enterprise investment will be exempt from capital gains tax. The held-over gain will, however, crystallise but there is scope for planning by making piecemeal disposals to realise gains below the level of the annual CGT exemption or to utilise capital losses from elsewhere.
As with EIS and SEIS, there are a number of rules and restrictions attached to the scheme.
For further guidance on the scheme, please click here.
To access the relevant sections of the Finance Bill 2014, please click here.
To access ACCA’s new and improved Technical Advisory website, please click here.