Crowdfunding means raising money for a business or project through small contributions from a large number of people.
Common types of crowdfunding:
- donation crowdfunding: mostly used by charities, this method involves asking for donations for a particular cause
- reward crowdfunding: you can fund a project in exchange for non-financial benefits like gifts, samples, or tickets to an event
- equity crowdfunding: you contribute in exchange for shares or a stake in a new business.
- debt crowdfunding: similar to equity crowdfunding, but using many loans from multiple investors. It’s also called peer-to-peer lending (P2P).
Participating in crowdfunding could mean a lower tax bill:
- 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: no tax reliefs – 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. 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 sold shares for a profit, and also dividend tax if you received dividends. There are also two schemes which offer great 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, plus any profits from selling those shares later are free of Capital Gains Tax. If the startups you invested in eventually fail, you can also claim CGT or Income Tax Loss relief.