Tax implications of crowdfunding
Crowdfunding, a word coined in 2016, is one that we are hearing a lot more of in property investment, with this alternative means of raising finance expected to ‘double every 60 days globally’ (Hayes, 2015)¹.
Permitting a large pool of individuals, ‘the crowd’, to invest in one single property, crowdfunding brings a long list of advantageous features, especially with regards to tax. At ShareProperty, we would like to highlight the string of benefits crowdfunding brings predominantly to property investors.
The instant buy-to-let landlord
According to the Financial Times², crowdfunding serves its purpose incredibly well, with journalist Merryn Somerset Webb hailing the success of alternative investment platforms.
‘You sign up to buy one [a property] with a group inside a company specifically created for the purpose that you are an instant buy-to-let landlord’ (Webb, 2015)².
Due to the current barriers facing buy-to-let landlords, many are turning to investing with a crowd, softening the blow of taxes such as Stamp Duty.
Estate agent Simon Gerrard outlines the changes that have affected landlords:
‘Smaller landlords are the backbone of this sector of the market. As changes in tax and other rules, including the stamp duty increases come into force, many smaller investor landlords may be deterred from entering the market, increasing their current portfolio or even selling up altogether. This would mean fewer suitable homes coming to the market to rent which will inevitably lead to a rise in rents as supply and demand comes in to play.’ (Gerrard, 2016)³
Through platforms like ours we aim to educate; giving our users a constant feed of information, industry news and market data. Ensuring all investors are clear on what tax their investment will be working with. Below we have created a selection of tax-related FAQs.
The largest change in property investment lies with buying and selling, with changes to Stamp Duty Reserve Tax for buy-to-let landlords pushing investors out of the market, thus seeing the wealthy monopolising it. Stamp Duty is the amount payable to HM Revenues and Customs for the acquisition of shares in property investment on the secondary exchange.
The amount payable is 0.5% of the cost of each individual share; a flat fee that applies to any amount of shares purchased.
Compared against the new 3% charge for anyone investing in a property (in the traditional fashion) worth £125,000 or less, it is understandable why some landlords are steering towards crowdfunding platforms like ShareProperty.co.uk.
One of the positive outcomes of the Budget is the reduction in Capital Gains Tax (CGT). This will drop from the current 18% to 10%, carried over to income generated through crowdfunding platforms.
The 10% dividend tax rate will no longer apply for UK taxpayers as of April 2016, with a £5,000 annual dividend allowance being introduced to replace it. This means that anyone investing less than £150,000 in share investments will pay no tax on their dividend.
Where many of the tax implications are similar to those experienced through investing in property in a traditional manner, areas such as Stamp Duty are decreased, with taxes and risks of a single property shared between the crowd.
If you would like to learn more about property investment through crowdfunding, then be sure to sign up with ShareProperty today.
**Please note that investing in early stage businesses involves risks, including loss of capital, illiquidity (the inability to sell assets quickly or without substantial loss in value) and lack of dividends and should only be done as part of a diversified portfolio. Your capital is at risk if you invest. Tax treatment depends on the individual circumstances and may be subject to change in the future.
- Hayes, M. (2015) Revolution in finance. Available at: http://www.taxation.co.uk/taxation/Articles/2015/02/24/332721/revolution-finance
- Webb, S. 2015. (2015) Crowdfunding is a good idea – in theory. Available at: http://www.ft.com/cms/s/0/bff453da-be7d-11e4-a341-00144feab7de.html#axzz44wzQn3kU
- Gerrard, S. (2016) Is this the end of buy-to-let? Available at: http://www.hamhigh.co.uk/property/is_this_the_end_of_buy_to_let_1_4471165