Community Investment Tax Relief
- The community investment tax relief (CITR) scheme offers a tax incentive to investors in accredited community development finance institutions (CDFIs). CDFIs lend and invest in deprived areas that cannot access mainstream finance.
- CDFIs provide financial services to enterprises and individuals, with the aim of achieving both financial and social returns.
- The total relief is worth up to 25% of the value of the investment over five years. This tax relief is in addition to any interest or dividend paid by the CDFI.
CITR is run jointly by HM Revenue & Customs (HMRC) and the department for Business Innovation and Skills (BIS). It is available to any individual or company with a UK tax liability investing in an accredited CDFI where the investment is held for at least five years.
How it works
The investor receives a relief to offset against their income or corporation tax liability of 5% of the amount invested in the year the investment is made, and a further 5% in each of the subsequent four years. The total relief is worth up to 25% of the value of the investment. This tax relief is in addition to any interest or dividend paid by the CDFI.
If an individual subscribes £10,000 for shares in a CDFI, CITR would reduce the individual’s income tax liability for that tax year and for each of the four subsequent tax years by £500 (5% of £10,000). Total income tax reduction over the five years would be £2,500.
CITR is a relief only against income tax; it cannot be used to reduce capital gains tax. If for any year you do not have enough Income Tax liability to make full use of the relief, any unused relief will be lost. Whatever type of investment you have made your relief may be reduced if you receive some form of value, financial advantage or benefit from the CDFI.
Where the investment is a loan there is scope for partial repayment within the first five years. But the extent to which repayments are permitted is limited, and any repayments reduce the amount of relief available. No repayments are permitted for the first two years of the loan. For the third, fourth and fifth years repayments cannot exceed 25%, 50% and 75% (respectively) of the amount advanced.
For each investment that you make under the scheme the CDFI will issue you with a tax relief certificate. You do not need to send the tax relief certificate with your completed tax return. However HMRC may ask to see the certificate if they enquiries about your return.
Tax relief can only be claimed once the tax year to which the claim relates has ended. However your employer deducts tax under PAYE you can write to HMRC to ask for a change to your current year’s PAYE code to include an amount to reflect the CITR that is expected to be due. This adjustment will reduce the amount of tax that is deducted under PAYE. Alternatively if you make payments under self assessment then you can write to HMRC and ask for those payments to be reduced to take account of the amount of CITR that is expected to be due. However note that if the payments on account finally due are greater than the amounts paid, interest will be charged on the difference.
To qualify for tax relief, investment must be in a CDFI accredited by BIS, on or after the date the CDFI is accredited. The investor claiming CITR must be the beneficial owner of the investment. the investment must be:
- a subscription for shares in, or securities of, the CDFI;
- a loan to the CDFI; or
- a deposit with a CDFI that is a bank.
The investment must be for a minimum of five years, and must not be subject to arrangements such as insurance, indemnities or guarantees that protect you against the risks attached to the making of that investment.
Accreditation under the CITR scheme is not a quality mark and does not guarantee the safety or success of any investment in that body. Accreditation simply means that the CDFI satisfies the scheme’s requirements enabling its investors to qualify for relief under the CITR scheme. It does not set out to establish the quality of the investments or to assess the underlying financial or institutional strength of the CDFI. Investors contemplating investing in a CDFI should make their own enquiries and seek the advice of an independent financial advisor as appropriate. See expert opinion on community development finance initiatives.
- The Community Development Finance Association (CDFA), the trade association for CDFIs, has published a guide for investors, including examples and case studies, which is freely available on its website.
- Detailed information is also available from the websites of HMRC and BIS.
A version of this article, written by Philanthropy UK, was published in a previous edition of A Guide to Giving (2008).