I’m fairly sure that most readers of this blog won’t have heard of something called Community Investment Tax Relief. You can find out a bit more about the scheme HERE – https://www.gov.uk/government/publications/community-investment-tax-relief-citr/community-investment-tax-relief-citr

In essence, it’s a bit like EIS but the earlier stage businesses you are helping are specifically set up to put something back into the local community. This is HMRC’s guidance on the subject:

The Community Investment Tax Relief (CITR) scheme encourages investment in disadvantaged communities by giving tax relief to investors who back businesses and other enterprises in less advantaged areas by investing in accredited Community Development Finance Institutions (CDFIs).

The tax relief is available to individuals and companies and is worth up to 25% of the value of the investment in the CDFI. The relief is spread over 5 years, starting with the year in which the investment is made.

I stumbled on this scheme courtesy of a new fundraising placement (private) by Charity Bank. Its mostly aimed at wealth managers and HNWs – the bottom line is that for investors with £100,000 or more they’re offering Tier 2 capital loan notes based on the bank balance sheet which could generate returns of upto 10% per annum for highest rate taxpayers. Here’s a background note explaining the current fund raising:

“Charity Bank is a specialist financial institution, (although authorised and regulated by the PRA in the conventional manner) which makes loans to charities and social enterprises. The bank is owned by charitable foundations including Big Society Capital, CAF and numerous well-known foundations. The bank operates on ethical guidelines with a social mission. Since the bank’s launch in 2002, they have made nearly a thousand loans to charities and social enterprises totalling over £270m.

The bank is small with the loan portfolio for year-end 2018 standing at £142.7 million. The book is expected to grow to £188.1 mil over 2019 . The majority (97%) of the bank’s loans are secured and total losses to date (since 2002)  amount to 0.36% of the amount drawn.  Charity Bank also raises money from depositors in the conventional manner and deposits are forecast to be £212 million at year-end 2019.

 They have CET1 ratio of 15.7% million as of Q1 2019 and whilst they have been loss-making on small scale (see page 6 of presentation) , they have since crossed over into profitability.

 They wish to grow their balance sheet and as with all banks require additional bank capital to do so. They plan to do this in an innovative manner; raising a 5-year T2 (i.e. conventional subordinated) piece of debt, which will benefit from an unusual tax relief called CITR (Community  Investment Tax Relief). This tax relief offers a 25% income tax rebate over a 5-year period (i.e. 5% per annum). As an example, an investor investing £100k would be able to reduce his income tax bill by £5k per year for five years. The bank is able to offer this unusual tax relief due to the nature of its lending.

 The bond will carry a 1% coupon, and the CITR tax relief of 5% on the sum invested as described above. For a higher-rate UK taxpayer (45%), this is the equivalent of receiving a yield of just over 10% gross.

 Charity Bank is offering 5-year T2 Bond with the following features:

 Issuer: The Charity Bank Limited

  • Size:  £2 – £5 million
  • Min piece £100k
  • Term – 5yr (bullet)
  • Coupon 1%
  • Plus CITR tax relief of 25% over 5-year term
  • Format – unlisted, off-market, registered form

 An important point – because the majority of return on this bond is made up of the tax relief, this bond is intended to be placed with private, tax-paying investors (and potentially companies and other tax-paying entities). It is not suitable for collective investment schemes, non-tax-payers, overseas individuals etc. Potential investors and their advisors should also pay attention to suitability, and the bonds should be people who can understand and are comfortable with the risk of T2 bank debt. As a bank capital instrument, the bond is not covered by the FSCS.

 This isn’t the first time the bank has used this novel tax relief structure. They also offer what is in effect a regular, limited issue investment savings product. You can see details of the recently closed 9th issue here – https://charitybank.org/ethical-savings/citra-9th-issue-qca-personal.

From what I can work out, it looks and smells a bit like the Tier 2 loans but with no 1% interest pa : here are the potential net returns for higher rate tax payers:

  1. Basic rate tax: 3.90% to 4.73% (subject to an individual’s utilisation of their personal savings allowance)
  2. Higher rate tax: 3.90% to 6.12% (subject to an individual’s utilisation of their personal savings allowance)
  3. Additional rate tax: 6.63% (no personal savings allowance)
  4. Corporation tax: 4.68% (tax rate of 19% used)