11 February 2016
Charitable Investing
by Frank O’Nomics
There seems little point in the government coming up with smart methods of funding “the third way” if little is done to publicise the legislation; then there will only be a limited development of products. This so far appears to have been the problem with Social Investment Tax Relief (SITR) which was introduced in the 2014 Budget. Nevertheless, it now seems that there are products for philanthropic investors to utilize, products which can both give a boost to donations and create an ongoing cash-flow stream for either the charity or the giver.
Many of us try to plan our charitable giving and like to allocate either a proportion of our income or, for those much better off, part of our surplus capital to worthy causes. Still more might class themselves as preferring to be ethical investors, trying to ensure that, while hoping to generate decent returns, their investment portfolio is, where possible, helping the greater good. SITR products have been developed to try to take advantage of all of these factors, by helping to direct funds to projects that fulfill an important public need, while employing the disadvantaged in society. The projects are self-sustaining and look to generate a return for the investors for whom the initial investment attracts Income Tax relief on the amount invested at 30% , or capital gains relief if the investment is of the proceeds from another asset.
There are conditions that have to be met by both you (you cannot be a partner in the enterprise) and the scheme, which will provide you with a compliance certificate once you have invested. A good example has been the launch of a £4 million bond to fund the purchase and renovation of 17 properties in Bristol. The properties have been renovated by 51 ex-offenders over the last 3 years and have generated £4 million in sales so far, with the workers receiving £1 million in wages. Over the period only one employee has reoffended, as opposed to an average for the area of 10%, which would suggest five. The social and economic benefits of a project such as this are numerous. More children are affected by parents being in, or having been in, prison than suffer from divorce, and the cost savings to the government in terms of court time and prison are significant.
There are now funds being set up so that investors can target a group of investments, which makes a great deal of sense in terms of spreading risk, given that the size of the projects tends to be quite small. The funds look a lot like Enterprise Investment Schemes, in that there is 30% upfront tax relief for investors, but have the benefit of including a bond facility (EIS schemes are equity only) so that investors have a fixed date on which they will get their money back and will receive a tax free income in the interim. If these funds are attracting money that would previously have been donated then it is quite likely that investors will be more than happy to renew their investments when they mature. The latter point is also important in that the projects will carry a reasonable degree of risk, and one might regard the return of the monies as an opportunity to be still more philanthropic.
There are a lot of benefits from this scheme for the projects themselves also. Take for example a project being considered by Resonance called Faresave. This company looks to tackle the twin problems of food waste and food poverty, by acting to allocate food thrown away by supermarkets. Some of the food is utilised by their catering company, which employs people otherwise excluded from the labour market. When the founders tried to raise bank finance they were faced with a double-digit interest rate, and would be paying the loan steadily from day one, yet by using an SITR vehicle they will only pay 6% and do not have to repay any capital for three years. For the investor, the combination of upfront relief and tax free income creates an effective IRR of around 14.5%. So seemingly a win-win situation.
Other possible projects include childcare for low income families, something for which there is great demand, and one which gets offenders and ex-offenders involved in reconditioning furniture and appliances which are then offered at affordable levels to low income families. A further project employs ex-offenders and those suffering from substance abuse to grow salads and herbs for restaurants, although currently this does not qualify for SITR until the exclusion of agriculture is lifted. Overall such projects, while small, can play a big part in tackling some major issues. In Bristol, where the above examples are situated, there are currently 700,000 people living in deprivation, with a 9.4 year difference between the life expectancy of the rich and poor sections of society. Resonance has launched a £5 million social investment fund which gives investors the opportunity to access projects such as those described.
Clearly this is not an investment for everyone, as it is really more about charitable giving than an investment that generates a return that you might need for your future financial well-being, and, even for the wealthy, most investment managers would not recommend more than 2% of an investable portfolio being allocated to something like this. Nevertheless, a survey by a major UK wealth manager of 1800 of their clients showed that two-thirds of them would be at least moderately interested in such a project.
A company called Worthstone was recently set-up to help financial advisors navigate the social investment universe and allow them to act as a bridge between investors and social enterprises. They estimate that retail investment advisors have access to almost £1.5bn of investable cash that could go into this sector. So, it is worth asking yourself if you have both social and financial goals, and what risks are you prepared to take to achieve the former. Is your financial adviser making you aware of such products? After all the government is prepared to pay you to be more philanthropic. As ever, it is every important to both get tax advice when considering products such as this, as well to consult an Independent Financial Advisor.
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