Staking cash in start-up companies has just become easier for investors with the Chancellor’s Autumn Statement 2015 announcement that ISAs will allow crowdfunding from next year.
George Osborne plans to introduce a new super ISA for investors in 2016 that will include equity crowdfunding and peer-to-peer lending for the first time.
The P2P lending ISA was talked about in the summer when the government put forward proposals for an ‘innovative finance’ ISA.
Now, this has been extended to cover equity and debt security crowdfunding after a consultation.
The two alternative finance options for entrepreneurs have subtle differences –debt security involves lending money to a company, while equity crowdfunding means taking shares in the business.
New packages on the way to help start ups
The debt security pays back interest over a fixed term, while the return on investment for an equity stake is growth in value of the shares and perhaps dividends on profits, although start-ups are likely to reinvest their profits in growing the business.
The ISAs will not be available for around a year as the government feels regulators have to draft rules to safeguard investors.
“A strong argument has been presented to include crowdfunding in ISAs,” said a Treasury spokesman.
“Equity crowdfunding has already been agreed, but there are some points about debt securities that need ironing out. New legislation will be put forward towards the end of next year to allow their inclusion in ISAs.”
ISAs allow the value of savings to grow tax-free and no tax is paid when money is taken out of the ISA.
Alternative finance investing
Investors directly involved in P2P lending or debt securities pay income tax on the interest they earn, while those with shares in a company pay capital gains tax on disposal of the shares.
This does not apply if the shares in a start-up are held through the Seed Enterprise Investment Scheme (SEIS), which offers 50% income tax relief on investments up to £100,000 and CGT-free growth on the value of shares.
If a start-up fails, SEIS also offers loss relief to investors.
However, the annual ISA limit is £15,240 for this year, so investors with more cash to speculate with have to look towards SEIS or other tax-relieved investments, such as the Enterprise Investment Scheme (EIS), which allows investments of up to £1 million.
Tax relief is less generous than SEIS, at 30% income tax relief on the ingoing equity capital and the same CGT and loss reliefs as SEIS.
This article needs checking for accuracy as it contains a number of significant errors.