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Chartered Accountants and Professional Business Advisers

What is social investment?

Socially responsible and ethical investments aren’t new. They involve excluding investments that can have a negative impact on society – tobacco, alcohol and so on. But the investor still expects a decent return. Social investment takes this a significant step further as investment is in an enterprise whose aim is to make a positive social impact. Examples include projects that tackle homelessness, support those with mental health issues or rehabilitate ex-offenders. These organisations aim to be self-sustaining by operating on a commercial basis rather than relying on donations or government funding. A project with the homeless might include training them to be baristas and helping them set up their own coffee carts, while the rehabilitation project could entail prison inmates baking bread which is sold commercially.

Shares and loans

These investments typically take the form of a loan with the lender receiving interest, rather than shares. This has the advantage that there is a fixed time (at least three years) after which the investor hopes to get their money back. On the downside there is no expectation of, say, the investment doubling in value. Equity or share-based investments are possible but such opportunities have so far been few and far between.

The big picture

The Government wants to reduce its involvement in these activities and is keen to promote these independently-run social projects. It has chosen to use tax reliefs to drive the change.

Tax incentives

The scheme provides incentives to individual taxpayers, similar to the Enterprise Investment Scheme. These include:

An income tax credit equal to 30% of the investment for the year in which it is made, or the previous tax year.
The tax on other capital gains (e.g. a holiday home or share portfolio) can be deferred by re-investing the gain in a SITR investment (provided this is made in the period beginning one year before and ending three years after the gain arose, and between 6 April 2014 and 5 April 2019). The gain is deferred until you dispose of the SITR investment or it ceases to qualify

Is it right for me?

People are becoming increasingly keen to ‘put something back’, but not everyone wants to make, and can afford, outright donations. With a loan that qualifies for Social Investment Tax Relief (SITR), you can make a positive contribution to society by putting your capital at risk, rather than by just giving it away. There’s the opportunity to see the difference it has made and to get more involved, perhaps contributing some time, advice or introducing useful connections. And of course if you get all your money back, you could reinvest it in another social enterprise. Your choice of investment is likely to be influenced by your enthusiasm for a cause and your confidence in the social enterprise’s business plan. If you use all of the available tax credit and the loan is fully repaid, then after three years your return would be in excess of 42%.

We can’t advise on specific investment decisions and that includes social investments. An independent financial adviser (IFA) can help you decide whether they are right for you, how much capital you want to risk, and to understand the level of that risk. Many IFAs who get involved with selecting social investments use a specialist to help evaluate the opportunities.

 

Specific advice should be obtained before taking action, or refraining from taking action, in relation to the above. If you would like advice or further information, please speak to your usual Shipleys contact.