Social investment tax relief made easy

1.    What is social investment tax relief?

Social investment tax relief (SITR) was introduced by the UK government in 2014 to encourage investment into businesses that are committed to achieving a social mission. If you make an investment in an SITR eligible social enterprise or charity you can claim 30% of that investment back to offset against your tax bill. Example: Joan Smith is facing a tax bill of £50K. She invests £100K in an SITR eligible social enterprise so is able to reduce her tax bill by £30K (30% of her investment). 

2.    Why has the government introduced a tax break for investing in social enterprises?

The government introduced SITR to level the playing field with mainstream businesses, which have been able to offer their investors tax relief benefits for many years now through the Enterprise Investment Scheme (EIS).  SITR was also intended to incentivise investment into businesses that generate social impact, to enable their growth. The tax relief means investors can get a return that reflects the risk they’re taking on, without having to burden social enterprises with high interest rates (because some of the return is covered by the tax relief).

3.    Are there any funds I can invest in now?

Funny you should mention that. One such fund is the Resonance Bristol SITR Fund which was launched in 2015.  It’s already raised £1.8m of investment, and continues to add on new investors roughly every quarter.  More importantly, it’s also done its first three investments into a range of exciting social enterprises.

4.    Why has Resonance launched one of the first funds of this kind and why is it called the Resonance Bristol SITR Fund?

Resonance was approached by a group of angel investors from Bristol who were passionate about bringing about change in their city. They wanted to support the growth of the numerous social enterprises already operating sustainably in Bristol, so that they could tackle poverty in the city on a larger scale.  And the name came about because the money will be invested in Bristol based social enterprises.

Many social enterprises in the city required investment to scale their impact but, as is the case with many social enterprises across the UK, a lack of assets they could borrow against (eg a building to offer as security for a mortgage) was a major stumbling block.  This made borrowing rates too high, in the region of 10-12% per annum. SITR offered a solution to this problem. With the tax relief covering some of the return to investors, social enterprises can access unsecured loans at more like 6% per annum.  

After a successful pilot with FareShare South West (the UK’s first SITR deal), Resonance developed the Bristol SITR Fund to ensure that many more enterprises could access the growth capital they needed on an affordable basis. Resonance is now actively working on the launch of similar SITR funds in other cities as well.  We’ve taken a city/region approach to this because we think the investment can be better coordinated this way. Interestingly, we’ve had investment in the Bristol fund from both individuals local to Bristol and also significant numbers from outside Bristol.  

5.    Can anyone invest in the Bristol Fund?

You’d need to be self-certified as a ‘sophisticated investor’ or  ‘high net worth individual’, or what’s called a 'restricted investor' (basically confirming that you do not have more than 10% of your total portfolio in this kind of investment). You’d also need to complete an assessment of whether this investment was suitable for you (given, for example, that the investment is tied up for around six years). Resonance itself doesn’t provide financial advice to people, but there are lots of organisations that do (e.g. Independent Financial Advisors, or Wealth Managers).

6.    Are investors guaranteed to get their money back?

As with any other investment, there are risk factors that investors need to consider.  All the investments we make from the fund go through a very detailed due diligence process – analysing the proposal from both the financial side, and from a social impact perspective. Each proposal is presented to and debated by our Investment Committee of four experts in the sector, before making a final decision about whether to invest. We then regularly monitor all the loans to check the business is performing as planned, and to check the social impact is being achieved as intended.

There are still risks involved in these types of investments of course, but anecdotal evidence (and in due course, we expect, emerging data) in the sector suggests that default rates in the social enterprise space may be lower than for mainstream businesses – we think this is because the management teams are absolutely committed to making it work, because they are determined to deliver the social mission they are passionate about.

7.    Can investors expect a return?

The target return (after taking into account the tax relief) is around 7-8% per annum on average over the eight year period (two years to invest, and six year loans). Obviously, much of that return comes in the early years through the 30% tax relief when the investment is made. But when you consider that a higher rate tax paying investor would need to find an investment with a 12% annual return (before tax) in order to generate that same 7% return (after tax), you can see that is a quite attractive deal.

8.    When can investors get the tax break?

Investors will receive a compliance certificate when their investment has been deployed, which they can use in their next tax return. The tax relief can be applied in the year the investment is made, or carried back one tax year. Resonance intends to invest in around 20 social enterprises over a two year deployment period, meaning investors should get tax relief on half of their investment in Year 1, and half in Year 2.

9.    Is there enough of a pipeline in Bristol to invest in?

Resonance has spent the last two years building a pipeline of investable social enterprises. There are now 26 live deals in the pipeline, nine proposals have been taken to investment committee and three investments have been made in the first few months of the Fund’s operations.  Many organisations are really only just waking up to the potential for investment to scale their operations, so the potential is huge.

10.    How long before investors get their money and a return back?

Each loan has a term of six years – the first three years are ‘interest-only’, and capital gets paid back over the final three years. This means investors generate income from the interest payments early on (this ‘interest income’ builds up as more loans are made), and they start to get their capital back after three years.  With a two year deployment period and six year loans, the longest that capital should be outstanding is eight years, but most of it will have been repaid significantly earlier.

Photo credit: Pexels/Anthony