BrewDog shareholders, including those who invested in the brewer’s Equity for Punks scheme, will see their holdings wiped out under the deal to sell the company.
US beverage and medical cannabis company Tilray has bought BrewDog’s UK brewing operations for £33 million, a fraction of the firm’s former valuation.
‘Punks’ were given no option to offset losses and could not claim tax breaks, unlike government-backed venture capital schemes, which offer more protection to investors.
Investing in start-ups and scale-ups can help boost growth, but investors should be compensated for the risk they take.
Currently investors in VCTs can get upfront income tax relief of 30%, falling to 20% from April.
Investors in SEIS get up to 50% income tax relief
Susannah Streeter, Chief Investment Strategist, Wealth Club:
“The sad saga of BrewDog highlights how investors in start-ups and scale-ups need to do their homework and opt for schemes offering them protection if the investment turns sour. BrewDog’s Equity Punks believed they were buying a slice in a company with a bright future, attracted by flashy marketing materials. But many didn’t read all the details in the prospectuses, which did highlight that they risked losing their money.
Under the crowdfunding scheme, they were also unable to benefit from tax incentives offered to investors in other government-backed schemes, like Venture Capital Trusts, Enterprise Investment Schemes and Seed Enterprise Investment Schemes. Such tax reliefs are aimed at compensating experienced investors for the risk they take in investing in small, high-growth companies. It’s vital that growing companies can access such streams of funding to give them the opportunity to thrive and help boost the UK economy. But there’s recognition that many fledgling companies will struggle, and by investing in a fund which backs numerous ventures, the risk is spread, given the likelihood that there will be some successes in the pack.
Right now, investors who back Venture Capital Trusts which invest in UK scale-ups can benefit from upfront tax relief of 30%, and the time is ticking to make the most of the incentive as it reduces to 20% from April. All returns are tax free.
The 30% income tax relief rate will stay for investors in Enterprise Investment Schemes (EIS). In addition, when you invest in EIS you can also defer capital gains you have made on other investments like shares or property for long as you stay invested in the EIS. It will only become payable once you come out of the EIS, unless you re-invest the money into another.
The Seed Enterprise Investment Scheme (SEIS), which invests in smaller start-ups, is an even bigger winner when it comes to tax savings. You receive up to 50% income tax relief when you invest and can also wipeout half your CGT bill from the sale of other investments.
Any gains you make in EIS and SEIS are CGT free and if it goes wrong you can also write off losses against your income tax bill in the year make the loss. So, if a £10,000 EIS investment resulted in a total loss, once you take into account all the tax reliefs, the most a 45% taxpayer could lose is as little as £3,850. On SEIS that amount would be as little as £1,550.
To keep the tax relief, you must hold a EIS and SEIS investment for at least three years and VCTs for a minimum of five years.
Experienced investors take a risk when backing the potential growth stars of the future, and anyone tempted to help support fledgling companies should closely analyse any prospectus to make sure they fully understand where they stand if promises do not live up to reality.”
