London commercial law firm and the UK's leading charity solicitors Bates Wells Braithwaite will be bringing you tax advice on charitable giving and investment through the City Philanthropy bulletin. Here consultant Bill Lewis explains how from April 2014 donors can invest in social enterprises tax-effectively through a new relief introduced by the Government in its 2013 Budget.
Traditionally philanthropists could either give money to charities and get tax relief on their donation or they could lend money to charities and not for profit organisations and get no tax relief. This compares poorly with the tax reliefs available for investments in business where investors get the equivalent tax reliefs but also keep their money. This has acted as an anchor to the growth of the not for profit sector.
In order to help this problem the Government announced in its 2013 Budget that it would introduce a new tax relief to encourage individuals to invest into social enterprises. After consulting with various interested parties draft legislation detailing the rules for the relief was published in December and the Government confirmed the new tax relief will apply to investments made on or after 6 April 2014.
The intention is that the relief will be very similar to the Enterprise Investment Scheme. In summary, individuals who invest in “social enterprises” will receive 30% tax relief on the value of their investment and any capital gains made on the investment can be deferred (and so any tax due deferred) by reinvesting the gain into a further social investment. The investment can be by way of loans or purchase of shares e.g. in Community Interest Companies.
“Investment” in this context means an equity investment or certain debt investments up to a maximum of £1m per investor. The investment has to last for a minimum of three years in order to qualify.
Investment can also be by way of a new social impact bond which will allow companies that work for the social good to raise money without issuing shares. Social impact bonds are a contract with the Government that commit to delivering performance based returns based on social outcomes and public sector savings. Some have understandably described them as a half way house between a donation to charity and a normal investment.
A “Social enterprise” in this context means:
- A Community Interest Company (CIC)
- A Community Benefit Society that is not a charity but has an asset lock
- A Charity
- Any other body prescribed by The Treasury
In all cases the organisation must have less than 500 employees and gross assets of £15 million or less – so tax relief will not be possible on investments with many of the larger charities.
The UK now has the longest tax law in the world – and in keeping with this the draft legislation and accompanying explanatory notes come to 66 pages of A4 sized paper. Much of this deals with HMRC’s concerns – some would say paranoia – at trying to deal with tax avoidance abuse. So there are various restrictions to the relief – for example not surprisingly the investment must be made for genuine reasons and not with the aim of avoiding tax; there are complex rules limiting the amount of such investments that can be made in each not for profit organisation, and the investor must not be a paid director or an employee of the social enterprise or a linked company to the social enterprise.
Given this, and the fact that the law here has not yet been finalised, we would recommend that anyone thinking of making a tax efficient investment in a social enterprise should first seek advice from their accountants or legal advisors.
Nevertheless this relief ought to be attractive to philanthropic investors who want to help the not for profit sector but do not want to make an outright gift.
But saying that an investor could lend money to a charity and in due course when the loan has been repaid could then make an outright donation of the same amount to charity.
£100,000 loaned to charity – tax relief £30,000
£100,000 loan repaid to the investor and then later donated to the same charity. Charity claims gift aid of £25,000. Gross gift to charity £125,000. Donor claims 45% tax relief (less the gift aid) on £125,000. This tax relief is worth £31,250.
So a philanthropist can in effect use the same £100,000 pot of money to loan to charity, and later give to charity, and receive £61,250 of tax relief while the charity has benefited from the loan of the money and a later outright gift of £125,000.
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