In the UK, crowdfunding is a means of raising money for a business or project through small contributions. These contributions are made by a large number of people, often strangers. Examples of crowdfund platforms are Unbound, Patreon and SeedInvest.
4 common types of crowdfunding (UK)
1. Donation crowdfunding
You mostly use this method if you’re a charity because it involves asking for donations to support a charitable cause
2. Reward crowdfunding
You can fund a project in exchange for non-financial benefits like gifts, samples, or tickets to an event
3. Equity crowdfunding
Through this method, you make a contribution to a project in exchange for shares or a stake in the new business
4. Debt crowdfunding
Similar to equity crowdfunding, this involves taking out many loans from multiple investors. It’s also called peer-to-peer lending (P2P)
How does crowdfunding (UK) work with tax?
Getting involved in crowdfunding could result in a lower tax bill. But it all depends on the project you’re funding. Here are the tax implications of each of the above forms of crowdfunding:
- Donations – unless the project is a charity, no tax relief is available to the backer. If it is a charity, you can claim Gift Aid
- Rewards – unfortunately, no tax reliefs here either as it’s technically an advance payment for a reward
- Debt – you usually pay tax on earnings from P2P lending just as you would on savings interest. But if the project can’t pay back the loan, you might be able to claim “CGT Loans to traders relief” or Social Investment Tax Relief (SITR)
- Equity – in most cases, you’ll pay Capital Gains Tax if you sell shares for a profit, and also tax on your dividends (if you received dividends). There are also two schemes which offer tax reliefs if you invest in startups: the Enterprise Investment Scheme (EIS) and the Seed Enterprise Investment Scheme (SEIS). Both schemes let you claim a percentage of your investment as an Income Tax relief. In addition to this, any profits from selling those shares later are free of Capital Gains Tax. And if the startups you invest in eventually fail, you can also claim CGT or Income Tax Loss relief