Here at Sapphire Capital Partners we have seen an increase in the number of clients who are interested in social investment, and we have no doubt that the social sector in the UK is booming.
A recent report by Social Enterprise UK notes that “the proportion of social enterprises that are three years old or less now stands at a remarkable 35% – more than three times the proportion of startups compared with SMEs (11%). Close to half (49%) of all social enterprises are ﬁve years old or less.”
Quite remarkable statistics I think you’ll agree!
This expansion in the social sector has been fuelled in part by the new tax incentive scheme, Social Investment Tax Relief, (SITR) launched in early 2014.
So why has SITR made a difference?
The government is fully committed to attracting investment into the social sector recognising that when a social enterprise profits, society profits. The SITR scheme was launched to make social investing more attractive to investors with a range of tax benefits:
- Income Tax relief at 30%
- Capital Gains hold-over relief on cash for investment raised from selling other assets
- Capital Gains disposal relief on investment growth
But the main reason why SITR has made such a difference is the eligibility of debt finance. /blog/five-reasons-why-sitr-is-the-obvious-choice
With only 16% of UK social enterprises structured by way of Share Capital, the SITR scheme opens doors which were previously closed under other tax incentive schemes, such as Enterprise Investment Scheme and Seed Enterprise Investment Scheme.
This means that a social enterprise can raise the necessary funds without having to give up any ownership or control of the business. The money can simply be raised by setting up a loan agreement with an investor, or investors./blog/four-things-you-need-to-do-to-attract-social-investment
The investor then becomes a debtor of the enterprise and will recoup their investment after an agreed period (minimum of three years), along with annual interest payments.The rate at which interest will be paid will be subject to agreement between the enterprise and the investor, and will generally be at a commercial rate. However, some investors who are pure philanthropists may not seek a return on their investment, and may be content with the return of their capital and the associated tax benefits.
Note that there is an element of risk as in all entrepreneurial ventures, and, to ensure that it meets SITR requirements, the loan can not rank above other loans and debts of the enterprise.
So how much can you invest?
You can invest up to £1m* in any given year. There is no lower limit.
A social enterprise can only raise €344,827* (circa £250,000) of SITR funds per year.
You can invest in more than one social enterprise providing you invest no more than £1m* in any given year.
*Note that the SITR scheme limits for investment are currently under review and are expected to increase significantly in the near future. /blog/sitr-expanding-the-scheme
If you are interested in investing, or attracting investment into your organisation, and would like our help please contact us at Sapphire Capital Partners LLP. We are happy to help.