After many false dawns, it looks like the UK fintech darling Monzo could be a public company by the end of next year. It will be a red – or coral pink – 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 on a collision course.
Think of stuffed pillows running into a buzzsaw.
That’s because Monzo was not eligible for Enterprise Investment Scheme (EIS) status for any of its five money-raising rounds on Crowdcube. For reasons I’ve never understood – lingering ill will after the financial crisis, perhaps – financial outfits such as neobanks are not eligible for EIS tax relief.
- See my guide to the Enterprise Investment Scheme for much more on EIS.
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.
And given the big cuts to the CGT allowance since Monzo raised its money, this is going to hurt.
Making money out of Monzo
I should declare my interest: I’m a Monzo shareholder.
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.
That first round though is the stuff of crowdfunding legend.
Monzo – then called Mondo – raised the £1m 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 £29m.
The maximum investment amount for that round was capped at £1,000. But with Monzo sporting a share price of £14.41 as of its last institutional valuation, the resultant 28-bagging return would still see first round backers sitting on an investment of £28,255 today. On paper anyway.
Crowdfunding investors in the next couple of rounds have done well too. Monzo’s share price quickly escalated through these rounds – from £1 to £2.35 then £7.72 – with the price topping out at £14.41 after a couple of institutional raises.
This reflected a company valuation of £4.5bn when Monzo enabled its staff to sell some shares in 2024.
Monzo crowdfunders and capital gains tax
Considering the nice-problem-to-have plight of Monzo’s earliest investors reveals just how much harsher the UK’s capital gains tax regime has become in recent years.
The annual CGT allowance was £11,300 when Monzo first raised money in 2017. The allowance had increased to £12,300 by the 2020-21 tax year.
But it was slashed to £6,000 in 2024.
And the annual CGT allowance is just £3,000 for the 2025-26 tax year.
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’s share price would book a capital gain of:
- £28,255 (sale proceeds) minus £1,000 (cost of shares) = £27,255
The £3,000 CGT allowance will then reduce their taxable gain to £24,255.
Assuming they are a higher-rate tax payer, this will result in a tax bill of:
- 24%*£24,255 = £5,821
From memory all the early Monzo rounds were capped at £1,000 per investor. We won’t hear stories of crowdfunded Monzo millionaires. But the amounts will still be large enough to deliver a nasty tax surprise for the unwary.
Take it as a reminder to double-check for EIS status when making investments in start-ups.
For example, I’ve 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’ll miss out on any long-term capital gains exemption benefits, as well as the income tax relief you get with EIS.
How you’re taxed, and what to do about
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 he was unaware (or had forgotten) that Monzo did not enjoy EIS relief, and thus he’d be on the hook for CGT.
Again, read our primer on capital gains tax in the UK.
But to summarise:
- You only become liable for CGT when you dispose of a chargeable asset. (That is something liable for CGT, such as Monzo shares).
- Dispose usually means sell. Until you sell there’s no gain so no CGT to pay.
- To get your Monzo shares into an ISA, you’d have to sell them and repurchase in the ISA. (I’ve heard chatter that ‘transferring’ to an ISA sidesteps CGT. It doesn’t!)
- As I mentioned you can make £3,000 in capital gains in a year tax-free.
- CGT is charged at 18% for basic-rate taxpayers and 24% for higher and additional-rate payers.
You can already see the easiest way to avoid CGT when Monzo floats will be to not sell your shares!
That way there’s no gain realised, so no tax to pay.
But of course you might want to sell your Monzo shares – or those in another successful start-up without EIS status.
Perhaps you think Monzo’s mooted £6.5bn valuation sounds toppy? Or maybe after a decade with your money locked way, you just want to take some off the table?
On valuation, we’ll have to see where Monzo floats. But £6.5bn isn’t crazy for a fast-growing fintech.
The US neobank Chime recently filed for IPO. Its valuation is put at $20-25bn. Chime has fewer customers than Monzo – eight million versus Monzo’s 12m – and it looks less attractive on other metrics too. Against that it does address the far larger US market.
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.
For instance I’ve written for Moguls about a 31-bagger that I’ve kept hold of, hoping for a 100-bagger.
It’s a far smaller company though. I concede it’s hard to imagine Monzo 28-bagging again anytime soon.
Tax mitigation options are limited
Even if you do want to sell, I wouldn’t rush in a situation like this.
For starters, think about your tax band.
Whether you’ll pay capital gains tax at the basic or higher CGT rate is determined by your total income. That is, your income from sources such as your salary combined with your capital gains.
Even if you’re normally a basic-rate taxpayer, this calculation may take you into the higher-rate income tax band and thus see your capital gain taxed at the higher CGT rate. You’ll probably want to avoid this if possible – by selling fewer shares so your total income remains within the basic-rate band, say, or by making one-off pension contributions to reduce your earnings.1
The most tax-efficient way to unlock your money would be to sell enough Monzo shares to realise a £3,000 gain each year, but no more. This way you’d defuse down your gains without paying CGT.
True, that will take a long time if you’re sitting on gains of £55,000 from multiple investment rounds.
But who knows? If you’re unlucky the market might reduce your gains too, once Monzo is listed on those high seas.
Which is another reason to sell, I suppose. Cozy private valuations will be a thing of the past once Monzo is a public company.
Monzo as a microcosm
A post about reducing capital gains tax on multi-bagging crowdfunding gains will prompt tiny violins from a decent majority of readers.
Perhaps accompanied by some schadenfreude, given how often I’ve called for higher inheritance taxes – which are arguably another tax on good fortune.
Indeed, some of you will ask what’s the difference?
Plenty, I say!
Firstly, investors who backed Monzo supported one of the UK’s few fast-growing tech-ish behemoths.
Don’t we want more of that? Why then are we whittling down the CGT allowance to trivial levels?
The CGT allowance should have at least risen with inflation since 2017. This would equate to over £15,000 for the current tax year.
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.
I don’t begrudge people their individual good luck in property. But high house prices don’t do much for economic growth or general prosperity in the round.
The second difference is that unlike the recipient of an inheritance, people risked their own savings to earn these gains from Monzo.
My friend I mentioned is doing well enough now. But back in 2017 his first £1,000 investment was meaningful money for a 20-something getting his career underway.
Statistically he was likely to lose all his money in Monzo. The ranks of super-successful crowdfunded companies are thin – the better-than-average late-2010s fintech included.
I lost the lot with a couple myself. Even the exit of Freetrade delivered only derisory gains in the end.
Compare that with the lucky recipient of an inheritance. They risked nothing and did nothing to earn their windfall except to not piss off their parents too badly.
Best of British
Ultimately what kind of environment do we really want in Britain?
I vote for a vibrant, go-getting economy that rewards hard word, risk taking, investment, and entrepreneurship over taxing income and gains to enable more feudal hoarding and social immobility.
Of course the EIS scheme does what I want. The only snag with Monzo is it didn’t qualify.
But EIS was introduced way back in 1994. A different time and place to today, when relatively few were in the higher-rate tax band, shelters like ISAs (then PEPs) were growing in scope, and wealth creators with lumpy incomes could make big pension contributions in the good years without penalty.
Famously, even New Labour in the late 1990s was relaxed about people getting rich. They’d come to understand that growth fuelled the engine that ultimately paid for the state and benefited everyone.
Then of course we had a boom in London for most of the first 15 years of the 21st Century, with the UK capital attracting bright talent who founded multi-billion-pound startups like Skype and Revolut.
Perhaps the peak of this era for Monevator readers came with the pension freedoms of a decade ago.
But recently? Brexit dragging down GDP, skilled foreign workers, entrepreneurs and investment going home or elsewhere, frozen tax thresholds, an exodus of millionaires and billionaires, London property stagnant for a decade, the NHS and other services creaking even as we pay more taxes, and higher rates on capital gains and dividends even as allowances have been slashed.
On the surface today’s post is very niche. Only a few tens of thousands of individuals will be able to cash in when Monzo floats. Most of them were late-round investors so even their gains won’t be huge.
But as a reflection of what the British economic engine can achieve at its best – and how recent times have thrown grit in this machine – I’d suggest it’s relevant to us all.
- Note: This calculation does not affect your marginal income tax rate. It only determines the CGT rate you’ll be charged on capital gains. [↩]
