CITM6090 - Tax Relief: Determining 'the invested amount'

FA02/SCH16/PARA21; ITAs337

The amount of tax relief due to an investor under the CITR scheme is calculated by reference to ‘the invested amount’. The maximum amount of relief due in any relevant tax year (individual investors) or accounting period (corporate investors) is 5% of the invested amount for that year or period.

Shares & Securities

In the case of investments that are shares or securities the invested amount is the amount subscribed by the investor.

But ‘value received’ by the investor may reduce the amount that is treated as having been subscribed for the shares or securities (see CITM7080).

Example 1

An individual investor subscribes £10,000 for shares in a CDFI on 1 June 2004. The shares are redeemable after six years.

The invested amount for each relevant tax year will be £10,000, (the amount subscribed). Tax relief of £500 (5% of £10,000) may be claimed for the tax year 2004/5 (the year in which the shares are issued), and for each of the four subsequent tax years.

Loans

Where the investment is a loan, the measure of the invested amount takes into account that the amount of the loan may vary over time.

• For the tax year or accounting period in which the investment date falls the invested amount is the average capital balance for the first year of the five-year period beginning with the day the investment is made (the five year period).
• For the tax year or accounting period in which first anniversary of the investment date falls the invested amount is the average capital balance for the second year of the five- year period.
• For any subsequent tax year or accounting period the invested amount is the smaller of:

Capping the invested amount in this way is aimed at discouraging back-end loaded loans while allowing the amount of the loan to fluctuate within a range set by the amount advanced over the period of six months beginning eighteen months after the investment date.

For the purposes of these calculations ‘average capital balance’ for a period is the mean of the daily balances of capital outstanding during that period.

Example 2

A company makes a loan of £100,000 to a CDFI on terms that provide for £10,000 to be repaid at the beginning of the third year, and at the beginning of each subsequent year until the loan is repaid.

The average capital balance, and hence the invested amount, for the first and second accounting periods for which relief is due is £100,000. But the repayments reduce the average capital balances, for the next three accounting periods - the ‘invested amount for the third accounting period is £90,000; for the fourth, £80,000; and for the fifth, £70,000.

Tax relief of £5,000 may be claimed for the accounting period in which the loan was made, and relief of £5,000, £4,500, £4,000, and £3,500 respectively for the accounting periods in which fall the four subsequent anniversaries of the investment date.

If for some reason the loan was increased to £150,000 at the beginning of the fifth year, the invested amount for that year would be restricted to £100,000, (the 18-24 month average capital balance) and so the maximum relief available would be £5,000.