Investing through Crowdfunding: Tax Implications

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With some experiencing difficulty in obtaining bank loans, SMEs are increasingly turning to Crowdfunding investment platforms to access growth capital.

What is Crowdfunding?

Crowdfunding is a way of raising finance by asking a large number of people each for a small amount of money. Typically, those seeking funds will set up a profile of their project on a website and then use social media, alongside traditional networks of friends, family and work colleagues, to raise money.

What are the different types of funding?

There are three different types of Crowdfunding: debt, equity and donation.

Debt funding allows for the lending of money while bypassing traditional banks. Investors will earn interest on the monies lent, and at the end of the term the loan is repaid. While the value of the loan would not normally increase if the business is successful, it can decrease if the business is unsuccessful as the company will not be able to repay the loan if it does not have sufficient funds.

Under equity funding, money is exchanged for shares, or a small stake in the business, project or venture. As with other types of shares, if the business is successful the value goes up. If not, the value goes down.

Finally, some people invest simply because they believe in the cause. Some rewards can be offered but returns are considered intangible and generally of little monetary value.

Will I pay tax on my investment income and gains?

The tax implications will depend on the investor’s personal circumstances, but generally speaking unless the investment qualifies for one of the government approved schemes such as the Enterprise Investment Scheme (EIS) or Seed Enterprise Investment Scheme (SEIS), investors will pay income tax and Capital Gains Tax (CGT) at their marginal rate on all income and gains realised.

If you would like any further advice regarding this topic or EIS/SEIS investments please contact Sue Stephens, Personal Tax Consultant.

You can also download our Alternative routes to finance guide for further information on sources of funding.