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A Revolution In The Making

This week in CrowdView we’re stepping back from our usual focus on up and coming campaigns as well as current investment offers, and focusing instead on the bigger crowd inspired picture. You might just have noticed that we had a budget this week. You can read about the impact of these changes here on our main AltFi news site. Most headlines – ours included – talked about the new sugary drinks tax but there were some pretty important smaller changes lurking under the bonnet.

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Three stand out for investors in the alternative finance space.

The first is that the entrepreneurs allowance on CGT has been extended to include long term investors in a business. In simple language this means that any angel who has invested in a start-up business can now benefit from the low 10% tax on future capital gains upto a maximum of £10m. This is a huge step forward for anyone interested in investing in smaller, younger businesses. Obviously most investors use the SEIS or EIS scheme to make their investment in start-ups but sometimes these tax wrappers don’t work for an investor or a business. Some businesses can’t apply for the EIS whilst some investor’s find that the enterprise investment scheme doesn’t quite fit their needs. Now, after the budget, they can make an investment in a small business and pay only 10% capital gains tax on any future profits as long as they hold their shares for more than three years.

The next big change is that capital gains tax has been reduced from 28% to 20% for higher rate tax payers and from 18% to 10% for basic rate tax payers. Again this is a big bonus for investors. Although most of us probably focus most of our investment attention on ISAs, SIPPs and the EIS, some investments don’t end up sitting inside these tax wrappers. The lower CGT will make all the difference and is a great tax giveaway for investors.

Last but by no means least within a matter of weeks we should see the emergence of the new Innovative Finance ISA, which in future will sit alongside the brand new Lifetime ISA. The latter tax wrapper, the LifeTime ISA, is brand new and was announced in the budget – it is in effect a new pension for under 40 somethings. As long as they keep their money within the ISA until they are 60, all investments are now free of tax with the government also kicking in an additional £1000 contribution alongside the first £4,000 contribution by the investor. And from April 2017 all savers will also be able to put up to £20,000 a year into ISAs, up from £15,240 at the moment.

These are all big benefits for any investor looking to put their money to work within the alternative finance space, especially crowdfunding. Play your cards right and you should be able to eliminate nearly all tax on capital gains, even if you don’t make use of the EIS scheme. So investing in private businesses suddenly looks like a compelling idea. Which is where the second part of our story begins.

At the beginning of the week AltFi News also carried a story about how Syndicate Room is in effect going a bit old school and offering stockbroker services – you can see original story here. We won’t repeat the details of the story but in essence Syndicate Room is offering their investors the chance to take part in public stockmarket IPOs or listings. This is traditionally the preserve of stockbrokers but now anyone into crowdfunding will be able to run their portfolio of shares across both public and private businesses online via Syndicate Room.

What this announcement didn’t say was that a bigger vision is lurking. Private Business PLC Goes Public via The Crowd.

The main crowdfunding platforms are in effect slowly putting in place the building blocks for the emergence of a new private stockmarket that will challenge the public Alternative Investment Market or AIM as it’s called, which is in turn owned by the London Stock Exchange. AIM was designed for fast growing, early stage businesses looking for a public stockmarket listing in order to raise capital. In reality many of the fastest growing businesses – or gazelles as they’re called – which comprise the bedrock of British business have chosen to ignore AIM altogether. One major barrier is the sheer cost of going public. Another is that stockmarket investors are quick to punish any young businesses that has a mishap – and once its reputation is sullied, the share price can drift for years.

As the likes of Syndicate Room,Crowdcube and Seedrs grow, they’ll increasingly attract more established, even profitable businesses to list their new shares on their platform. The crowd will in effect get to back the thousands of gazelle like businesses out there – many of which have turnover of well over £10m a year with more than a few highly profitable. These businesses might well prefer the more private nature of crowdfunding platforms, especially if they are able to raise copious amounts of capital. The next step is for the platforms to offer a much bigger secondary market in those shares i.e allowing a mechanism whereby investors can buy and sell shares in private businesses after they’ve been listed on the platform. At this point the crowdfunding platforms look and feel more like AIM. Syndicate Room’s move to offer access to public market issues is just another step forward – presumably it’ll be able to offer its gazelle the chance to move at some stage from an initial private fund raise on line through to a full public market listing for the most successful outfits. In effect the crowdfunding equity platforms end up becoming competitors to AIM.

And all this against the backdrop of sharply lower taxes on investing in private businesses outlined earlier on in  this article. Throw in all those generous tax wrappers and have we the makings of a genuine revolution for UK Private Business PLC. Watch this space – CrowdView will keep you posted on the best new ideas as they emerge.

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