\n<\/p>\n
A<\/span>fter many false dawns, it looks like the UK fintech darling Monzo<\/a> could be a public company by the end of next year<\/a>. It will be a red \u2013\u00a0or coral pink \u2013 letter day for early investors who backed the challenger bank a decade ago. But an IPO could also put this rare win for crowdfunding and capital gains tax<\/a> on a collision course.<\/p>\n Think of stuffed pillows running into a buzzsaw.<\/p>\n That\u2019s because Monzo was not eligible for Enterprise Investment Scheme (EIS) status for any of its five money-raising rounds on Crowdcube. For reasons I\u2019ve never understood \u2013 lingering ill will after the financial crisis, perhaps \u2013\u00a0financial outfits such as neobanks are not eligible for EIS tax relief.<\/p>\n Long story short, unlike most crowdfunded projects in the UK, because Monzo was not EIS-eligible, gains could be liable for capital gains tax if and when Monzo does IPO and an investor decides to sell.<\/p>\n And given the big cuts to the CGT allowance since Monzo raised its money, this is going to hurt.<\/p>\n I should declare my interest: I\u2019m a Monzo shareholder.<\/p>\n Alas I missed the first Crowdcube fundraising round. But I lucked my way into the second round and did a small follow-on investment in the third.<\/p>\n That first<\/a> round though is the stuff of crowdfunding legend.<\/p>\n Monzo \u2013\u00a0then called<\/a> Mondo \u2013\u00a0raised the \u00a31m it sought in a mere 96 seconds, and crashed the Crowdcube servers. Just 1,877 ordinary investors were able to buy shares at 51p, for a pre-money valuation of \u00a329m.<\/p>\n The maximum investment amount for that round was capped at \u00a31,000. But with Monzo sporting a share price of \u00a314.41 as of its last institutional valuation, the resultant 28-bagging return would still see first round backers sitting on an investment of \u00a328,255 today. On paper anyway.<\/p>\n Crowdfunding investors in the next couple of rounds have done well too. Monzo\u2019s share price quickly escalated through these rounds \u2013 from \u00a31 to \u00a32.35 then \u00a37.72 \u2013 with the price topping out at \u00a314.41 after a couple of institutional raises<\/a>.<\/p>\n This reflected a company valuation of \u00a34.5bn when Monzo enabled its staff to sell some shares in 2024<\/a>.<\/p>\n Considering the nice-problem-to-have plight of Monzo\u2019s earliest investors reveals just how much harsher the UK\u2019s capital gains tax regime has become in recent years.<\/p>\n The annual CGT allowance was \u00a311,300 when Monzo first raised money in 2017. The allowance had increased to \u00a312,300 by the 2020-21 tax year.<\/p>\n But it was slashed to \u00a36,000 in 2024.<\/p>\n And the annual CGT allowance is just \u00a33,000 for the 2025-26 tax year<\/strong>.<\/p>\n Ignoring any other share gains, a Monzo shareholder who bought the maximum shares in the first round and sells them at a future IPO at today\u2019s share price would book a capital gain of:<\/p>\n The \u00a33,000 CGT allowance will then reduce their taxable gain to \u00a324,255.<\/p>\n Assuming they are a higher-rate tax payer, this will result in a tax bill of:<\/p>\n From memory all the early Monzo rounds were capped at \u00a31,000 per investor. We won\u2019t hear stories of crowdfunded Monzo millionaires. But the amounts will still be large enough to deliver a nasty tax surprise for the unwary.<\/p>\n Take it as a reminder to double-check for EIS status <\/strong>when making investments in start-ups.<\/p>\n For example, I\u2019ve noticed quite a few European and even US companies raising money on crowdfunding platforms in recent years. These do not qualify for EIS, so you\u2019ll miss out on any long-term capital gains exemption benefits, as well as the income tax relief you get with EIS. <\/p>\n I actually have a friend who invested the maximum in the first two Monzo rounds. Despite him thus having unicorn status in the crowdfunding pantheon, when I told him about the recent IPO rumblings<\/a> he was unaware (or had forgotten) that Monzo did not enjoy EIS relief, and thus he\u2019d be on the hook for CGT.<\/p>\n Again, read our primer on capital gains tax<\/a> in the UK.<\/p>\n But to summarise:<\/p>\n You can already see the easiest way to avoid CGT when Monzo floats will be to not sell your shares!<\/p>\n That way there\u2019s no gain realised, so no tax to pay.<\/p>\n But of course you might want to sell your Monzo shares \u2013\u00a0or those in another successful start-up without EIS status.<\/p>\n Perhaps you think Monzo\u2019s mooted \u00a36.5bn valuation sounds toppy? Or maybe after a decade with your money locked way, you just want to take some off the table?<\/p>\n On valuation, we\u2019ll have to see where Monzo floats. But \u00a36.5bn isn\u2019t crazy for a fast-growing fintech. <\/p>\n The US neobank Chime recently filed for IPO<\/a>. Its valuation is put at $20-25bn. Chime has fewer customers than Monzo \u2013\u00a0eight million versus Monzo\u2019s 12m \u2013 and it looks less attractive on other metrics too. Against that it does address the far larger US market.<\/p>\n Achieving a big valuation matters when investing in risky start-ups. You need to squeeze all the gains from your winners to make up for the losers.<\/p>\n For instance I\u2019ve written for Moguls<\/em> about a 31-bagger<\/a> that I\u2019ve kept hold of, hoping for a 100-bagger. <\/p>\n It\u2019s a far smaller company though. I concede it\u2019s hard to imagine Monzo 28-bagging again anytime soon.<\/p>\n Even if you do want to sell, I wouldn\u2019t rush in a situation like this.<\/p>\n For starters, think about your tax band.<\/p>\n It may be a capital gain will lift you into the higher (or additional) rate tax band, which you\u2019ll probably want to avoid if possible. By selling fewer shares, say, or making pension contributions<\/a> to reduce your income.<\/p>\n The most tax-efficient way to unlock your money would be to sell enough Monzo shares to realise a \u00a33,000 gain each year, but no more. This way you\u2019d defuse<\/a> down your gains without paying CGT.<\/p>\n True, that\u2019s going to take a long time if you\u2019re sitting on gains of \u00a355,000 from multiple investment rounds.<\/p>\n But who knows?\u00a0If you\u2019re unlucky the market might help reduce your gain too, once Monzo is listed on those high seas.<\/p>\n Which is another reason to sell, I suppose. Cozy private valuations will be a thing of the past once Monzo is a public company.<\/p>\n A post about reducing capital gains tax on multi-bagging crowdfunding gains will prompt tiny violins from a decent majority of readers.<\/p>\n Perhaps accompanied by some schadenfreude, given how often I\u2019ve called for higher inheritance taxes \u2013 which are arguably another tax on good fortune.<\/p>\n Indeed, some of you will ask what\u2019s the difference? <\/p>\n Plenty, I say!<\/p>\n Firstly, investors who backed Monzo supported one of the UK\u2019s few fast-growing tech-ish behemoths.<\/p>\n Don\u2019t we want more of that? Why then are we whittling down the CGT allowance to trivial levels?<\/p>\n The CGT allowance should have at least risen with inflation since 2017. This would equate to over \u00a315,000 for the current tax year.<\/p>\n Also, compare investment gains from startups to the vast majority of inheritance gains, which were simply earned by buying a big house back when they were cheap and living in it.<\/p>\n I don\u2019t begrudge people their individual good luck in property. But high house prices don\u2019t do much for economic growth or general prosperity in the round.<\/p>\n The second difference is that unlike the recipient of an inheritance, people risked their own savings to earn these gains from Monzo.<\/p>\n My friend I mentioned is doing well enough now. But back in 2017 his first \u00a31,000 investment was meaningful money for a 20-something getting his career underway.<\/p>\n Statistically he was likely to lose<\/a> all his money in Monzo. The ranks of super-successful crowdfunded companies are thin \u2013 the better-than-average late-2010s fintech included.<\/p>\nMaking money out of Monzo<\/h2>\n
Monzo crowdfunders and capital gains tax<\/h3>\n
\n
How you\u2019re taxed, and what to do about<\/h3>\n
\n
Tax mitigation options are limited<\/h4>\n
Monzo as a microcosm<\/h2>\n