Crowdfunding is a way for modest donations to be used to raise money for a project or company in the UK. Many individuals, many of whom are strangers, contribute to this. Crowdfunding websites include Unbound, Patreon, and SeedInvest.
Four typical crowdfunding models (UK) #
1. Crowdfunding for donations
This approach is mostly used by charities since it entails soliciting funds in favour of a benevolent purpose.
2. Crowdfunding rewards
In return for non-monetary advantages like presents, samples, or event tickets, you may provide funding for a project.
3. Crowdfunding for equity
By using this approach, you contribute to a project in return for stock or an ownership interest in the newly formed company.
4. Crowdfunding for debt
This is analogous to equity crowdfunding in that several loans are obtained from various investors. Another name for it is peer-to-peer lending (P2P).
How does taxation relate to crowdfunding in the UK? #
Participating in crowdfunding may lead to a reduction in your tax liability. But everything relies on the initiative that you are sponsoring. The tax ramifications of the various types of crowdfunding mentioned above are as follows:
Donations: The supporter is not eligible for any tax benefits unless the initiative qualifies as a charity. You may claim Gift Aid if it’s a charity.
Reward payments are officially considered an advance payment for a reward, therefore there are sadly no tax benefits here too.
Debt: P2P lending revenues are often subject to taxation, just like savings interest. However, you may be eligible to apply for Social Investment Tax Relief (SITR) or “CGT Loans to Traders Relief” if the project is unable to repay the loan.
Equity: If you sell your shares for a profit, you will often have to pay capital gains tax in addition to dividend tax (if you received dividends).
Additionally, there are two programs—the Enterprise Investment Scheme (EIS) and the Seed Enterprise Investment Scheme (SEIS)—that provide tax breaks for startup investments. You may claim an income tax reduction on a portion of your investment under both schemes. Furthermore, there is no capital gains tax on any proceeds made when those shares are sold in the future. Additionally, you are eligible to get CGT or Income Tax Loss relief if the startups you invest in ultimately fail.
