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Social Investment Tax Relief – a missed opportunity for charities?

Social Investment Tax Relief has been widely underused by the charity sector since its introduction in 2014. In part this is because the restrictions exclude larger charities from the scheme, and smaller charities often focus on seeking donations income rather than loan funding.
How generous is the tax relief?

But charities may rue the missed opportunity when SITR expires in April 2023, because where it can be made to work the tax relief is extremely generous and a great opportunity to boost funding.

How generous is the tax relief?

SITR is available on investments in both shares and loans, although charities can generally only make use of it on loans. The scheme provides a 30% income tax relief to an investor on a loan made over a period of at least three years. In practice, because the tax relief provides a good rate of return for the investor by itself, the loan could be completely interest-free.

Although 30% income tax relief is technically the same relief that investors get on equity investments under the better-known Enterprise Investment Scheme, SITR is arguably a more generous tax relief because loans are broadly a lower risk investment than shares and do not carry the practical difficulty of needing to find a buyer.

About the author

Luke Savvas

+44 (0)20 7556 1460
savvasl@buzzacott.co.uk

But charities may rue the missed opportunity when SITR expires in April 2023, because where it can be made to work the tax relief is extremely generous and a great opportunity to boost funding.

How generous is the tax relief?

SITR is available on investments in both shares and loans, although charities can generally only make use of it on loans. The scheme provides a 30% income tax relief to an investor on a loan made over a period of at least three years. In practice, because the tax relief provides a good rate of return for the investor by itself, the loan could be completely interest-free.

Although 30% income tax relief is technically the same relief that investors get on equity investments under the better-known Enterprise Investment Scheme, SITR is arguably a more generous tax relief because loans are broadly a lower risk investment than shares and do not carry the practical difficulty of needing to find a buyer.

What are the main conditions for the charity?

What are the main conditions for the charity?

  • The charity or social enterprise must have no more than £15m gross assets and 250 employees.
  • The investment must be used in a trading activity (with certain trades, such as property development being excluded), however the trade can be carried out by a subsidiary that is owned 90% or more by the charity.
  • The maximum amount of investment permitted under state aid limits over a three year period is approximately £300,000 or £1.5 million if the charity or social enterprise has been operating for less than seven years.
  • It is possible for charities to apply for advance assurance from HM Revenue and Customs to ensure that their fundraising plans will qualify for SITR.
Could a donor make a loan and then write if off?

Could you ask a donor to make a loan and then write it off?

If a loan arrangement is conditional on the loan being written off as a donation after three years, this is highly likely to be viewed as a donation from the outset and hence not eligible for SITR.

However, if the lender voluntarily writes off the loan without being obliged to do so, there could be an opportunity for both SITR on the loan and Gift Aid to be claimed by the charity on the write off of the loan. Following recently updated HMRC guidance, Gift Aid can be claimed on loan write-offs as long as suitable documentary evidence is kept.

For example, an investor who is a higher rate taxpayer makes an interest free loan of £100,000 to a charity in April 2022 which expires in April 2025, at which point the investor decides to write off the loan and makes a Gift Aid declaration. The charity will receive a Gift Aid repayment of £25,000 and the investor will receive an income tax repayment of £30,000 under SITR plus a further income tax saving of £25,000 under Gift Aid higher rate relief. In total the charity will receive £125,000 at a cost of only £45,000 to the lender/donor.

However, charities should exercise caution in seeking to discuss this approach with potential investors and are encouraged to seek advice before setting up such an arrangement. If set up without due care, the arrangement could be at risk of losing eligibility for both SITR and Gift Aid.

How you can set up an SITR scheme?
How you can set up an SITR scheme

For further advice on how you can set up and benefit from the SITR scheme please complete the form below and one of our experts will be in touch.

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