P2P Lending with Tax Relief - unique to Community Chest
Choose which viable social enterprise you want to support, set the interest rate you want to receive and decide how much you want to invest.
♦ Lending to social businesses attracts 30% tax relief for UK Income Tax payers
♦ Plus monthly interest of between 2% and 10% depending upon risk
♦ Capital to be repaid after 3 years
♦ £2m matched funding support from Big Society Capital
♦ Support your favourite project [CLICK HERE]
♦ Uses the ThinCats peer to peer platform to harness the power of crowdfunding
♦ Loan management and collections by FCA regulated ThinCats
♦ Loans are unsecured and capital is at risk
♦ Minimum investment £1,000
Peer to peer lending was ‘invented’ in 2005 to harness the power of the internet and bypass traditional banks and financial markets, allowing private investors to join lending syndicates making loans directly to borrowers. By cutting out the banks lenders get decent returns on their investments and borrowers get the funds they need. Peer to peer lending has become an important source of business finance and at the same time is providing good returns to private investors.
We work with ThinCats who are the UK market leader specialising in arranging secured loans for SME businesses. In just over 6 years they have arranged over £230m of loans with interest rates for lenders at around 8%. Community Chest is a specialist ‘Loan Sponsor’ on the ThinCats peer to peer business lending platform specialising in social enterprise loans that benefit from tax relief. Community Chest Loans are different from normal ThinCats loans because the availability of tax relief is conditional upon the loan being unsecured.
In order to lend to our social enterprise projects you will need to join ThinCats, membership is free and there is no obligation to lend. We suggest that if you are not already a member you sign up to learn more about peer to peer lending so that you are ready to invest when a suitable opportunity arises. www.thincats.com
About Social Investment Tax Relief (SITR)
It is very important that lenders fully understand that these loans are only suitable for investors that pay UK Income Tax. Before getting involved you should make sure that you understand how they might fit in with your investment and tax planning/strategy.
SITR is for loans to social enterprises and was introduced in 2014 and works in a very similar way to the well established Enterprise Investment Scheme that provides tax relief on equity investments. Benefiting from SITR depends upon the borrower having sufficient taxable income to claim the refund and the lender qualifying and continuing to qualify throughout the life of the loan.
Community Chest SITR Investment Features:
|Lending to||Social enterprises that qualify for SITR - either Community Investment Companies (C.I.C.) or charities. They must be commercial and able to repay the loan. A limited company can be converted to a C.I.C. There are some restrictions on the disposal of fixed assets by a C.I.C. and a limit on the proportion of profits that can be distributed as dividends.|
|Tax relief||30% of the capital invested as a tax credit in the first year of investment. Also, if the investor sells an asset that is subject to Capital Gains Tax they can defer the liability for the duration of the loan by investing the gain in a social enterprise.|
|Minimum Loan Period||3 years during which time you get interest monthly but no capital repayments until the end of the term.|
|How is Tax relief paid||The Borrower issues a certificate to each lender to forward to HMRC. The Lender can elect to have the tax credit in the current year or set it off tax paid in the previous year.|
|Security||The lack of security is a condition of getting SITR tax relief. The loan must rank equally with any other funding.|
|Return on Investment||We expect SITR loans to pay interest at a rate between 3% and 10% depending upon the risk. The actual rate will be decided by auction. Tax may be payable on the interest income. The effect of 30% tax relief spread over a 3 year loan boosts the potential income by up to 10% p.a.|
|Risks||Lender needs to be paying tax in the year of the investment or the previous year. The Borrower must continue to qualify for SITR during the 3 year loan.|
|Minimum Investment||£1,000 (set by the ThinCats software). This limits the lenders ability to diversify their portfolio diversification.|
|Maximum Investment||A single investor can invest up to £1m in any number of qualifying businesses in any one tax year. Tax relief can be allocated to the previous year which allows for some tax planning flexibility. The allowance is independent of any investments made under the Seed Enterprise Investment Scheme and the Enterprise Investment Scheme.|
|Maximum the business can borrow||Currently €344,827* (c.£290,000) over 3 years. but this limit is due to increase to £1.5m in 2017.
In addition, Big Society Capital have agreed to lend up to half or £250k (whichever is the greater) at an interest rate of 6% to match SITR investors. This means that the maximum loan we can currently provide is just over £500,000 but this will eventually increase to £1.75m.
|Lending Decision||Lenders select the individual projects that they want to support and set the interest rate they actually want to earn in an auction. The lowest bids are then selected to make up the loan with each lender getting the rate they actually bid but the borrower makes one interest payment a month to ThinCats who then distributes the income to each syndicate member.|
|How to take part in an auction||The auction is only open to registered members of the ThinCats.com p2p platform but membership is currently free and there is no obligation to invest. In order to bid you must have cleared funds in your client account so you will need to plan ahead if there is a particular auction you would like to bid on.|
* last updated 19th May 2017
We have prepared a simple spreadsheet that illustrates the returns provided by the tax relief. Click on this link to download it: Community Chest Tax Illustrations.
You can find out more about SITR by following this link
Notes for Social Business Supporters on investing in your favourite project
These notes are intended to help supporters of a particular project who are not familiar with “peer to peer” lending.
Please remember that no investment advice is being given and you are responsible for making your own investment decisions, if you have any doubts about investing you should seek expert advice. These investments are unsecured loans and your capital is at risk.
What is peer to peer lending?
Peer to peer (p2p) lending facilitates many lenders contributing a small amount to a large loan so that the borrower has a worthwhile capital injection and each lender is able to limit their exposure if a particular business gets into difficulty.
P2p lending to businesses was 'invented' by ThinCats and Funding Circle in 2010 and since then several other platforms have been established. Between them they have arranged well over £2bn of loans. Across the industry losses have been running at about 2% but because typical p2p interest rates have been in the region of 7-12% the overall return has been very attractive when compared with other forms of investment. Risk is normally limited/mitigated by spreading the money you invest across a large number of loans.
Community Chest uses the ThinCats lending platform to allow hundreds of private investors to join a syndicate that makes a relatively big loan to a social business. Each of the investors contributes a minimum of £1,000 and the business can attract a loan of between £50,000 and £1.5m. Community Chest manages the preparation of the Information Pack for lenders and obtaining approval for the tax relief. ThinCats manages the process of creating the syndicate by holding an auction, drawing up the loan documents and distributing all interest and loan repayments.
Membership of ThinCats is free and there are no fees payable by investors or any obligation to lend. ThinCats earns a fee to cover the costs of making and administering the loan. ThinCats already has over 5,000 members, many of whom have funds in their client account ready to bid, so since this is likely to be your first experience of peer to peer lending you need to be prepared. The auction is likely to last for between 7 and 21 days and it will take a few days to set up your ThinCats account and deposit funds so plan ahead to avoid missing the auction.
How do I make a loan?
To take part in an auction you need to join ThinCats.com as a lending member and deposit funds into your client account ready to bid. Investors will be bidding to join the lending syndicate by taking part in an auction, saying how much they want to lend and how much interest they want to receive. When the auction finishes ThinCats takes the lowest bids needed to make up the loan and lenders get the rate that they actually bid. The borrower pays the weighted average interest rate. If there is more competition to join the syndicate the interest rate will be driven down and it may be that the existing supporters of a particular project drive down the interest rate paid by their own borrower further than ThinCats investors would normally consider. The result of this process is that 'the market' sets the interest rate to be paid by the borrower.
If you are joining ThinCats specifically to invest in a project you already know and support, you may only want to bid on a single loan and this means that you may not be able to reduce your risk by diversifying your investment across 20 or 30 different loans. Hopefully you will have the advantage of knowing that particular project much better than most of the other syndicate members and will be in a better position to judge the risks and social benefits involved.
Why don't I just make my investment directly?
SITR tax relief is available for those directly investing in a social business but the advent of the ThinCats “Community Chest” peer to peer lending service makes the management of a large number of small investors practical for the borrower because they don't have to deal with hundreds of individual lenders, just one agent acting for them all.
Each small investor still has a loan directly to the business and if the peer to peer platform were ever to cease trading the loans would continue to be legally binding and unaffected. ThinCats arranges all of the legal documentation and collects and distributes all income. ThinCats is regulated by the FCA to undertake these activities and this includes making provision for this service to be continued even if the platform itself were to become insolvent.
What return can I expect on my investment?
Normal ThinCats loans are secured and ThinCats lenders have come to expect interest rates in the order of 8% to 12% depending upon the risks involved. Social businesses are expected to attract investors prepared to lend at between 4% and 8% because the 30% tax relief increases the effective return by 10% p.a. On a three year loan investors will receive between 14% and 18% p.a. which compensates for the lack of security (a condition of SITR). Note that 10% of the return per annum is a tax refund (paid as 30% in the first year) and that tax will be payable on the actual interest paid unless it falls within your annual tax free interest allowance.
As an investor, to qualify for SITR you must pay UK Income Tax and invest in a qualifying business. SITR tax relief provides 30% tax refund on the capital you invest in a commercial business operated by a charity or Community Interest Company (C.I.C.) which must also aim to benefit its community.
You can elect to carry your Income Tax relief back to the previous tax year and there are also tax planning benefits available for investors who are paying Capital Gains Tax.
The minimum bid on ThinCats is £1,000 and this may be a problem for some project supporters who would prefer to contribute a smaller amount. The ThinCats account has to be in a single person’s name only the person whose name is on the ThinCats account can claim the tax relief.
In order to qualify for tax relief, the loan has to be unsecured. This means that if the business fails you could lose your investment. The 30% tax relief is intended to make the investment more attractive.
Normally peer to peer investors seek to spread their available funds over a wide portfolio of investments so that if one fails it does not represent a large proportion of their investment. If an investor is only interested in one particular deal it will increase the risk but that could be offset by detailed knowledge of the business and/or a desire to support the good cause.
Most ThinCats loans are ‘amortising’ which means that over the life of the loan investors get a fixed monthly income of interest and capital so that by the end of the loan you should have received all of your investment back plus interest. Community Chest loans normally earn monthly interest but the capital is not paid back for at least 3 years. This is a condition of getting the tax relief.
ThinCats loans can normally be traded on a secondary market, allowing you to sell your investment if you need access to the cash. Because of the SITR tax relief you have to keep your loan for a minimum of 3 years and so selling on the secondary market is not possible.
Some contributors to charities and social businesses may prefer to make a donation to the project and are not comfortable about lending money and charging interest. However, by making a 3 year loan you get 30% tax relief plus interest and your project still gets the funds to use. There is nothing to stop you donating any of your income and eventually some or all of the capital you are investing if you wish. Indeed, if you were to lend £1,000 over 3 years instead of giving £1,000 you would receive £300 in tax relief and (perhaps) £150 in interest plus your initial investment back*. If at the end of three years you donated all of your loan proceeds to the project they would receive £1,450 and it would have cost you £1,000. If you are giving the money to a charity that should also qualify for Gift Aid.
We hope that investors who join ThinCats to make a single loan to the project they support may find that the availability of range of other Community Chest investments capable of generating an income between 13-17% pa. would enable them to build a portfolio of investments in good causes and at the same time earn an attractive return on their investment.
Most UK residents do not pay tax on the first £1,000 of their interest earned each year. Please check your personal circumstances.
Community Chest loans on ThinCats are not intended for investors who do not pay tax (such as pension funds or overseas investors) because they cannot benefit from the tax relief. However, we do not prevent such investments because ThinCats members may still want to make a loan because they wish to support a good cause and they may consider that more important than income or the tax relief.