Tax breaks for social investment could generate an extra £480m of investment from wealthy individuals over five years, according to a report published today by Big Society Capital and the City of London Corporation.
The Role of Tax Incentives in Encouraging Social Investment, written by the social investment consultancy Worthstone and the law firm Wragge & Co, says there are about 225,000 households with more than £100,000 that they could invest and for whom a tax incentive would be a primary motivator.
Based on information from these people about whether they were "very likely" or "fairly likely" to make an investment, the report says that there are about 48,000 households likely to make an average investment of £10,000 each over the next five years.
The report says the social sector should be able to access tax breaks similar to those already existing to encourage investment in small businesses, such as the enterprise investment scheme and venture capital trusts.
These tax reliefs are based on an investor taking an equity stake – buying a share of a company – and are not suitable for most social sector organisations, which cannot issue shares.
The report also calls for reforms to community investment tax relief, which allows investment in deprived communities through community development finance institutions. This relief is little used because of the bureaucratic limitations placed on it.
The report cited Ipsos Mori research that found many wealthy individuals with more than £100,000 of investable wealth were keen to invest their income to achieve a social good. Only 25 per cent of these people would not be interested in social investment, it found.
The Ipsos Mori research identified a "sweet spot" of "passively interested" investors who would be highly incentivised by a tax relief.
Today's report says: "For those more ‘actively interested’ in social investment, a tax incentive was found to be influential in encouraging these investors to make a commitment to social investment, though it was not a primary motivation."
It says any relief should encourage "risk capital" investment, where investors share the risk if investment goes wrong, and "long-term patient capital", where the investor does not expect immediate repayment and invests for the long term.
Nick O’Donohoe, chief executive of Big Society Capital, says in his introduction to the report that the "right tax incentive" was "fundamental" to taking advantage of the growing interest in social investment."This report helpfully details not only the significant potential size but the options for incremental reform to existing incentives that can effectively target the areas of most need among the social sector organisations – risk capital," he said.