Tax breaks for social investment will expand fivefold this April, in a move designed to boost the uptake of deals that can generate more than just a financial return.
The government’s decision to allow the social investment tax relief (SITR) to be used in much bigger transactions is aimed at “making it attractive to a wider range of enterprises and investors”, it said in a recently published policy paper.
From April, up to £1.5m of government-subsidised investment can be raised by social enterprises, such as charities and community groups. That is a big increase from the current three-year rolling limit of €344,000 (£293,000).
Grace Howells of Resonance, a fund manager which set up one of the first funds in the country to benefit from SITR, says the change will allow it increase the scale of its fund. “Now we can do bigger deals, we can back a much wider range of social enterprises and improve the pace at which we can deploy investors’ funds.”
How does the tax relief work?
Introduced in April 2014, the tax relief is 30 per cent of the value of a qualifying investment. So by lending a social enterprise £10,000, an investor would get a £3,000 reduction in that year’s income tax bill, as well as a potential capital gains tax deferral.
Because investors are getting a tax incentive, social enterprises should benefit from a lower interest rate than they would get from banks or other finance providers. The average cost of capital for all deals struck in the first two years of the relief was 4.8 per cent, according to analysis by NPC, a charity think-tank for Big Society Capital, a social investment bank. The enterprises are only required to start paying back the principal of the investment after three years.
What sort of investments are being made?
Projects have ranged from saving a village pub to expanding a community sports centre. But employment, training and education have emerged as the most common areas for investment.
The most recent deal, announced this week, was an investment in Ability Tec, a community interest company that designs and assembles electronic circuit boards. It has received a £260,000 loan from the Bright Futures SITR Fund, which has raised £1.5m from more than 40 taxpayers. The loan will allow Ability Tec, which operates out of a factory in Bolton, to double the size of its workforce, which is largely comprised of people with disabilities.
Who is investing?
The main take-up of the tax relief has been from wealthy, sophisticated investors — and indeed the relatively high risk nature of the investments means that funds can only be marketed to this group. But investments in community projects often involve much smaller sums, in one case averaging as little as £230.
Resonance, which says investors typically put £25,000 into its Bristol SITR fund, draws heavily on local enthusiasm: a third of those putting money in the fund are from that city. Everybody who invests receives updates, case studies and social impact reports. Some also offer their time and expertise.
Annika Tverin, director of Social Finance, a not-for-profit organisation, says people drawn to social investments tend to be highly motivated by the idea of putting their money to work in a good cause. “Impact investing is definitely on the up.”
Will it take off?
The uptake of the tax break has had a slow start. Just £3.4m was invested across 30 organisations in its first two years, according to the NPC research.
But several funds have been set up to benefit from SITR and offer investors a chance to spread their risks. Social Investment Scotland, a non-profit provider of business loans, has already raised a pilot fund and will launch another SITR fund later in the year. Resonance plans to expand its Bristol fund and will launch more funds in other regions later this year.
Raising the limit to £1.5m may not be enough to draw many other fund managers into the sector, according to Dan Kiernan, of Intelligent Partnership, a research provider. Mark Brownridge, director-general of the EIS Association, says a £5m limit would give the sector a better chance of take-off.
Gavin Francis, founder of Worthstone, a social investment consultancy for wealth advisers, says the appetite of investors is not in doubt. “This is one area where the supply of capital from investors is greater than demand,” he says. He is upbeat about its potential. “It has all the ingredients of a market that could grow significantly.”
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