Resonance’s Senior Investment Manager Oliver Pollard reflects on Social Investment Tax Relief (SITR), and how Resonance regional SITR Funds have appealed to investors, wealth managers and social enterprises alike.
It’s worth remembering why SITR was introduced in 2014 by the UK government in the first place; it was to encourage investment into social enterprises, charities and community businesses which are committed to achieving a high impact social mission. For these organisations, SITR investment can offer a great way of raising capital to enable them to sustain or grow their positive impact. It also allowed the new legal structures available to UK social enterprises (Community Interest Companies and Community Benefit Societies) to access equivalent benefits to the well-established EIS, SEIS and VCT for private companies.
SITR allows individuals making an eligible investment to deduct 30% of the cost of their investment from their income tax liability, either for the tax year in which the investment is made or the previous tax year. The investment must be held for a minimum period of 3 years for the relief to be retained.
If individuals have chargeable gains in that tax 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.
The income tax and capital gain tax reliefs provide a substantial incentive for investors; combine this with the fact that their investment is into social enterprises which are making a positive impact on society, and it means that for certain investors an SITR Investment could make sense as part of their portfolio.
To make sure new investment is directed to the enterprises which need it most and to meet EU regulations, the investment and the organisation receiving it must meet certain criteria. Organisations must have a defined and regulated social purpose. Charities, community interest companies or community benefit societies carrying out a qualifying trade, with fewer than 500 employees and gross assets of no more than £15 million may be eligible.
Other conditions and criteria apply to the enterprise, investor and the investment made; for example, under EU rules governing the initial introduction of SITR, individual enterprises can only receive a certain amount of government subsidised investment. The limit is €344,827 (about £250,000) over 3 years. The exact sterling equivalent is the spot exchange rate on the date of investment.
How has SITR fared so far?
Since launching our first SITR Fund in 2016, we have worked with a number of leading wealth managers and IFAs, and their clients, and find that what they really like is the similarity of SITR to EIS (Enterprise Investment Scheme), therefore the basic workings of the relief are well understood. In addition they find it easy to see the impact that the funds are making to communities.
Despite the current attractiveness of SITR to both investors and investees, it is true to say that investment levels, either directly or into industry wide SITR qualifying investments or funds, have not been as high as both the government and industry envisaged; as a result of this, there is an ongoing open government consultation on how greater stimulus can be provided, through changes being made to regulation surrounding SITR.
Resonance, alongside other leading industry figures, have fed into this consultation, and believe that with a number of changes SITR can gather greater momentum.
For example, by slightly widening the eligibility criteria for qualifying social enterprises, such as expanding eligible activities to include community-owned renewables, short term asset hire, or include social enterprises that offer smaller-scale food production where the organisation is not eligible for other farm subsidy (currently farms of less than 5 hectares), we would see greater opportunities to invest in more social enterprises.
Whilst modifying the tax reliefs for investors, such as incorporating Inheritance Tax Relief into the scheme or offering a 50% tax relief for investments into earlier stage social enterprises, for deals sub £150,000 (to mirror the existing Seed Enterprise Investment Scheme, SEIS) could increase investor capital into SITR schemes.
Resonance – taking a regional approach
Resonance currently has 3 regional SITR funds, based in the South West, West Midlands, and the most recently launched was in the North West. The largest of the funds is the South West which has to date (end January 2020) has made 16 investments into social enterprises in the region. Investors into the funds have either come directly into Resonance, or through the wealth managers or IFAs that we work with.
By taking a unique regional approach we believe that this has major benefits to both investors and social enterprises. For investors, it allows them to invest in a region in the UK where they may live or have a strong connection. For social enterprises having investment managers on the ground in these regions, it means that we can develop unique insight and relationships into a region, understanding the social enterprise landscape and the challenges and opportunities that present themselves. Our plan is to open more regional SITR over the coming years.
2019 was our most successful year of investing in social enterprises from our SITR funds; we invested nearly £1m into 7 social enterprises. Whilst tackling different social issues, all the investee social enterprises have similar goals and social missions: to have a positive and sustainable impact on the communities and individuals they support, helping make the world a better place.
Their work has been primarily helping to improve people’s life chances by providing health and wellbeing support, mentoring, training and employment opportunities for those in need – in particular:
- Young people and children with social, emotional or mental health problems and those with physical and learning difficulties
- Adults struggling with addiction, employment issues or criminal behaviour
- Schools, communities and cultural organizations
2020 promises to be an exciting year for SITR, with the government consultation and more and more wealth managers/IFAs and High Net Worth Individuals considering social impact investing as a way of making a greater difference with their capital.
Resonance are a social impact investment company, founded in 2002, currently with over £210m of funds under management, and a mission to connect capital with social enterprises. We are committed to forging a bridge between transformational social enterprises and investors who value both their profitable business model and the social mission that drives them.
Oliver Pollard is a Senior Investment Manager at Resonance, with responsibility for the development of Resonance’s SITR Funds across all regions of the UK.