A consultation on a tax relief for social investment was launched today by David Cameron, the Prime Minister.
Speaking in London this morning at the Social Impact Investment Conference, a social finance conference that Cameron instigated as part of the UK’s presidency of the G8 in 2013, Cameron said the tax relief could generate an additional £500m for social investment over the next five years.
The consultation, jointly launched by the Treasury and the Department for Business, Innovation and Skills, suggests mirroring existing tax reliefs for investors, such as the Enterprise Investment Scheme and Venture Capital Trusts, as closely as possible.
It says the relief would cover investment in regulated social enterprises, including charities, community benefit societies and community interest companies.
The consultation says investors would be able to make investments of up to £1m a year and claim back up to 30 per cent of their investment against their income tax or capital gains tax liabilities. Investments would have to be held for at least five years to qualify for the relief. Gains on disposals of investments would be free from tax and the investment would allow a "rollover" from year to year. Investors would not be allowed to be linked to the organisations in which they invest.
The proposed relief would be open only to organisations with fewer than 250 employees and a limited level of assets or turnover, likely to be £16m.
The consultation says the relief would apply to debt instead of equity – investment in shares – and should not apply to organisations that qualify for EIS or VCT, or which have already issued substantial amounts of share capital.
The relief, it says, would apply to unsecured loans with no preferential rights in the event the company was wound up, and that the loans would be linked to the financial performance of the organisation invested in.
But it says the relief would not apply to loans that are repaid "at a rate that substantially differs from a commercial rate of return". This would preclude many existing investments to charities, which are "soft loans" at below market rate.
EIS and VCT schemes have exemptions for certain types of low-risk, asset-backed activity. However, the consultation says these exemptions might not be necessary for investment in regulated not-for-profit organisations.
The proposal says that investments of more than €200,000 would require the relief to get state aid approval.
The consultation runs until 6 September.