Extended tax incentives for social investment initiatives
Of the four main venture capital schemes (EIS, SEIS, VCT, SITR) the 2021 Budget introduced a small change only to the Social Investment Tax Relief (SITR) which provides income and capital gains tax hold-over reliefs for investors in qualifying social enterprises. The SITR is extended to April 2023.
Tax incentives available for SITR investors
The three primary tax incentives are:
- income tax relief of up to 30% of the eligible subscription
- deferral relief for capital gains tax (CGT)
- a CGT exemption on the disposal of the investment.
The annual investment limit is £1m. To qualify for the CGT exemption on disposal, the investment must be held for three years from the date of investment.
Conditions to be met by the investor and the investment
There are various requirements including:
- investment must be in new shares or new qualifying debt investments
- the amount invested must be paid over
- no pre-arranged exits
- no risk avoidance
- no linked loans
- restrictions on existing investments
- no tax avoidance
- no disqualifying arrangements
- restrictions on being an employee, partner or paid director
- restrictions on interest in the capital of the social enterprise
- no collusion with a non-qualifying investor.
A qualifying social enterprise is an unquoted community interest company, community benefit society or charity, with fewer than 250 full-time equivalent employees. The money generally has to be raised for a qualifying trade and this is subject to a list of excluded activities.
Various anti-avoidance measures exist to counter attempts to protect the investor from risk and to prevent them from realising value from the social enterprise because of their investment.
EIS, SEIS, VCT regimes remain unchanged
- EIS provides income tax and capital gains tax reliefs to investors who invest in small, unquoted, trading companies.
Income tax reducer allows to reduce the income tax liability in the year of investment by 30% of the amount invested, up to a maximum of £1m of investment, or £2m if £1 is invested in knowledge intensive companies. It is possible to carry back all or part of the investment to the preceding tax year as long as the limit for relief is not exceeded for that year.
In addition, no CGT is payable on sale of shares in an EIS qualifying company if sold after three years. Losses on EIS shares are allowable against capital gains, as well as against income.
It is possible to defer CGT on other assets if proceeds are reinvested in an EIS company whether the investor is connected or not, as long as the investment takes place within one year before or three years after the disposal.
- SEIS is aimed at riskier companies and rewards investors with a 50% income tax reducer, up to the maximum of £100k investment. CGT reinvestment relief reduces a gain to 50% of proceeds reinvested in SEIS shares. Disposals are free from CGT after three years and losses may be offset against capital gains or income of the year of investment and the previous year. Capital loss incurred on SEIS shares is allowable but reduced by any income tax relief claimed.
- VCT scheme offers tax efficiencies when investing through an investment trust that has been approved by HMRC. The trust invests in, or lends money to, unlisted companies. The maximum annual investment in a VCT is £200k. The scheme offers a 30% income tax reducer in the year of investment and dividends paid are not taxable. Gains are exempt from CGT when the shares are sold, but there is no relief of capital losses against income.
This article has been shared from ACCA In Practice, to whom copyright belongs. Whitefield Tax are an ACCA Member Firm