Investors in Seed Enterprise Investment Scheme (SEIS) start-ups could gain a boost from Brexit if the government decides to scrap European Union state aid rules restricting tax breaks.
SEIS is one of the governments great business successes, seeing £338 million of investment flow into close to 4,300 companies in two years until April 2015.
However, SEIS is subject to European state-aid rules that restrict tax breaks the government can offer to investors and entrepreneurs.
The rules aim to give a level funding playing field to start-ups across the EU.
Once Britain leaves the EU, the government can decide to repeal the state-aid rules and revamp SEIS to offer even better tax breaks.
How SEIS helps investors
SEIS already provides investors with some of the most generous tax incentives for start-up businesses.
Investors can pick up a 50% refund on income tax break for an investment of up to £100,000 in a tax year.
For investors staking £100,000 into a start-up who pay income tax of £100,000 or more in the year of investment, the refund is equivalent to £50,000.
On top of that, the value of shares in the SEIS company are exempt from capital gains tax, providing they are held for three years and the company meets a series of trading conditions.
If the value of the shares at the end of the three years means the investor loses money, loss relief will refund most of the difference between the income tax refund and the depreciation in the value of the shares.
Boost for businesses
The government will have the same option with the Enterprise Investment Scheme (EIS) and Venture Capital Trusts.
The changes cannot take place until the government has triggered Article 50 of the Lisbon Treaty.
For investors, EU rules apply until Britain has negotiated a Brexit, which is likely to take up to two years, although an unlimited extension can be agreed.
Changing the SEIS, EIS and VCT tax break framework would attract investment into Britain and give entrepreneurs who cannot raise finance from the banks a chance to kick-start their businesses with equity rather than debt funding to ease cash flow problems.