Social Investment Tax Relief (SITR) - investors

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1 Social Investment Tax Relief (SITR) - investors What is SITR - how does it affect me? SITR provides a range of income and capital gains tax reliefs which can be claimed by individual investors for investments they have made in social enterprises, with a view to helping people and communities. It will be in place for investments made, or capital gains arising, in the period from 6 April 2014 to 5 April You are potentially able to claim 1 or more of the following reliefs, in respect of your investment in 1 or more social enterprises: Income Tax relief - at 30% of the amount you invest Capital Gains hold-over relief - depending on when the investment was made and when the gain arose Capital Gains disposal relief - an investment which has attracted Income Tax relief is exempt from Capital Gains Tax if you dispose of it for more than you paid To be able to claim Income Tax or Capital Gains hold-over reliefs: you (as the investor), the investment and the social enterprise must first meet certain SITR conditions once the SITR conditions are all satisfied, then you (the investor) must continue to satisfy the requirements relating to the tax reliefs you wish to claim However, if during the qualifying period for the investment you, or the social enterprise or the investment no longer meet the SITR conditions (even if you originally did so) then HM Revenue and Customs (HMRC) can refuse to accept a claim to these reliefs, or (if the relief has already been given) withdraw or recover it. Conditions that apply to investors and the investment There are some conditions which you have to meet, to be able to support a claim to SITR. These relate to: your relationship with the social enterprise the terms on which you ve invested in the social enterprise the type of investment you ve made Your relationship with the Social Enterprise You can invest either directly in your own name, or have a nominee invest on your behalf. If you make your investment via a nominee, it is you and not the nominee who can claim tax relief. Either way, there are rules about the closeness of the relationship between you and the Social Enterprise. You, or any individual who is your associate, must not: be a partner or a trustee or the social enterprise or of a subsidiary of the social enterprise be a paid director or employee of the social enterprise or of a subsidiary, partner or partner of a subsidiary of the social enterprise during the period from 1 year before the investment to the third anniversary of the investment,own more than 30% of the social enterprise s: o o ordinary share capital o loan capital voting rights

2 Any investments by your associates are taken into account in calculating your 30% limit. Associates means business partners, spouses, civil partners, parents and grandparents, children and grandchildren, or the trustees of any settlement where the investor is a settlor or beneficiary. If you agree to invest in someone else s social enterprise and they agree to invest in yours so that you can get round the 30% rule, your investment won t qualify for tax relief. The terms on which you ve invested There are some conditions designed to make sure that your money is genuinely being put at risk in the social enterprise: the investment won t qualify for tax relief if it is part of a tax avoidance scheme - HMRC won t regard normal commercial investment arrangements between an investor and a social enterprise as a tax avoidance scheme for this purpose there must not be any arrangements in place for the 3 years from the date of investment for you to sell your investment during that period there must not be any arrangements, in connection with your investment, for the social enterprise to stop trading or to sell valuable assets your investment won t qualify if you buy it using a loan, and that loan has special terms that wouldn t apply to a normal commercial loan and that are related to you making the investment The type of investment As an investor, you can claim SITR if you ve invested in: shares which the social enterprise has issued to you and which you have fully paid for in cash at the time of issue qualifying debt Shares To qualify, shares mustn t have a right to a dividend: of a fixed amount any part of which is at a fixed rate that s fixed by reference to the amount invested at a rate that s fixed for any reason that doesn t depend on the enterprise s financial success that s more than a reasonable commercial rate Qualifying shares must rank alongside or behind other shares in the social enterprise in the event of the social enterprise winding up. Also, qualifying shares must rank behind all the social enterprise s debts if it is wound up, other than debts which qualify for SITR. This means that you can t be guaranteed to get your money back before other shareholders or lenders, if the social enterprise fails. Debt investments A debt investment is when you lend money to the social enterprise. The: amount lent, and any interest on the lending, must not be secured on any assets rate of any interest payable must not be more than a reasonable commercial rate debt must rank behind other debts of the social enterprise, except other unsecured debt, in the event of the social enterprise winding up

3 If the social enterprise also has issued share capital, a debt investment will only qualify for SITR if, so far as is possible, the debt ranks equally with the lowest ranking share capital in the event of the social enterprise winding up. This is likely to need a special clause in the investment agreement and you may want to consider taking legal advice on suitable wording. This means that you can t be guaranteed to get your money back before other shareholders or lenders, if the social enterprise fails. When is an investment made? HMRC need to know the date on which you make your investment. That s because that date lets us know which tax year the relief is for. We also need it to determine your eligibility for CGT hold-over relief. Also, most of the qualifying conditions for SITR have to apply for a 3 year period from the date of investment. In most cases, the date you make your investment will be clear, but there are some rules to help us decide in the more complicated cases. For shares, you make the investment for SITR when the social enterprise issues the shares to you. For qualifying debt investments, when you make the investment for SITR will depend on the investment agreement. The rules cover situations where you only make 1 payment to the social enterprise, as well as situations where you commit to lend a sum of money to a social enterprise but the social enterprise can draw down smaller parts at different times. Where either: the investment agreement involves only one payment of money to the social enterprise a payment is the first of several payments, You make the investment when the enterprise issues a debenture or debentures to you. If the type of loan does not involve the social enterprise issuing anything to you, then you make the investment when the investment agreement takes effect between you and the social enterprise. If the investment agreement involves several payments, then for each second and subsequent payment, you make an investment for SITR when you pay each amount to the social enterprise. If the social enterprise issues debentures, or the loan agreement takes effect, at a date later than the date or dates each payment is made, you make the investment for SITR on the date of issue or the date the agreement becomes effective. For SITR, the term debenture has a wide meaning and includes any type of investment instrument or agreement which creates or acknowledges indebtedness. Social Enterprise Conditions There are separate conditions which the Social Enterprise (in which you have invested) has to meet. You will know if these have been met, because the Social Enterprise will give you a Compliance Certificate in respect of your investment in it (this confirms that they meet the conditions). If they fail to provide you with a Compliance Certificate, you can t make a claim to any of the tax reliefs below. The tax reliefs available Assuming you, your investment and the social enterprise meet all the relevant SITR conditions, you can then consider which tax reliefs you want to claim. To make such a claim, you need to satisfy the requirements relating to that tax. None of these reliefs is available if you have had relief for the investment under the Enterprise Investment Scheme, the Seed Enterprise Investment Scheme or Community Investment Tax Relief.

4 Income Tax relief Income Tax relief is available at 30% of the amount you invest. The maximum annual investment you can make which qualifies for tax relief is 1 million. There s no minimum investment limit. HMRC gives the relief by reducing your tax liability for the tax year you made your investment, as long as you ve enough tax liability to set it against. You don t have to be UK resident to claim the relief, as long as you ve enough UK tax liability to set the relief against. If you prefer, you can ask us to treat some or all of your investment as though you made it in the tax year immediately before the year you actually invested. Your tax relief will then be set against your tax liability for the earlier tax year. You can t ask us to carry an investment back to a tax year before the 2014 to 2015 tax year. You can claim tax relief up to 5 years after the 31 January following the tax year you made your investment. You can claim Income Tax relief if you buy qualifying shares, and/ or make qualifying debt investments and: have a UK tax liability to claim the relief against - you don t need to be a UK resident hold your investment for at least 3 years from the date of issue Capital gains hold-over relief You can defer payment of tax on a capital gain if the gain is reinvested in shares or debt investments that would also qualify for SITR Income Tax relief. The investor doesn t need to have made a claim for SITR Income Tax relief. The gain can arise from the disposal of any kind of asset but both of the following must apply. The: gain must arise in the period from 6 April 2014 to 5 April 2019 SITR qualifying investment must be made in the period 1 year before or 3 years after the gain arose The deferred capital gain is brought back into charge when the earliest of the following apply: you dispose of the investment (other than to a spouse or civil partner) the investment is cancelled, redeemed or repaid the social enterprise stops meeting the SITR conditions If you make a new investment in a social enterprise, you may claim for this reinstated gain to be held-over once more, subject to the qualifying conditions described above. Capital gains disposal relief If you ve had Income Tax relief (which hasn t been withdrawn) on the cost of your investment, and you dispose of your investment after you ve held it for at least 3 years, any gain you make on your investment is free from Capital Gains Tax. This means you don t need to make a claim for CG disposal relief, as the gain is already deemed to be exempt. Please note that, to be exempt from Capital Gains tax on disposal, the investment must first have had SITR income tax relief attributable to it (that is, you must have made a successful claim to income tax relief in respect of the investment). When can HMRC recover my tax relief? We will withdraw your tax relief completely if, at any time during the 3 years from date of the investment: you become employed by the social enterprise your holding in the social enterprise exceeds the 30% limits mentioned above the social enterprise stops meeting any of the conditions which apply to it

5 the social enterprise takes over a company or acquires a trade in which you ve had a controlling interest We will withdraw some or all of your tax relief if at any time during the 3 years from date of the investment: you dispose of all or some of the investment (other than to your spouse or civil partner) you or an associate receive 'value' from the social enterprise, or from a person connected with that social enterprise. This can include things like: o the social enterprise repaying any of its shares or securities which you hold o the social enterprise repaying a debt owed to you, if that repayment is in connection with the making of the investment o you receiving a loan or benefit from the social enterprise o the social enterprise paying a debt which you owed to someone else o the social enterprise selling an asset to you at less than market value (or you selling an asset to the social enterprise at more than market value) the social enterprise repays, redeems or repurchases any of its share capital held by another person - this doesn t apply if the other person has had tax relief on their investment, and has that tax relief withdrawn The amount we recover will depend on how much you get for the sale of your investment, or how much value you receive, compared to the amount you invested. If you pay the social enterprise for any value you receive from it as soon as you can, we will not recover your tax relief. You must tell HMRC about any of these matters within 60 days of them happening. If you do not, we may charge a penalty. How will HMRC recover my tax relief? For the withdrawal of Income Tax relief, we will make an assessment to tax for the tax year in which the relief was claimed. For the withdrawal of Capital Gains Hold-Over Relief, we will treat the deferred gain as becoming chargeable to tax when the event causing relief to be withdrawn occurs. Any gain will be taxed at the rate of Capital Gains Tax applicable to that later year. You may claim to hold-over this gain if you invest the necessary amount in a social enterprise within the relevant time limits and meet the other conditions for CGT hold-over relief stated above. Help and support If you have any questions about the eligibility criteria for SITR, you can: consult your professional adviser (if you have one) ask HMRC for further information You can write to: The Small Company Enterprise Centre (Admin team) Mid-size Business 0777 PO Box 3900 Glasgow G70 6AA You can also telephone on or us on enterprise.centre@hmrc.gsi.gov.uk. You should address any questions about claiming the relief to your own tax office (in writing) or telephone the Helpline.

6 Income Tax enquiries for individuals, pensioners and employees