BES firms push up exit prices before they are shown the door: Investors can choose from a bewildering array of schemes with tempting terms. Alison Eadie reports

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The Independent Online
The Business Expansion Scheme is going out with a bang.

Nick Percival of BESt Investment says schemes now open or in the pipeline aim to raise about pounds 300m before shutdown at the year end. This compares with a total of pounds 537m raised since April. The deluge of schemes, all trying to distinguish themselves from the herd, creates bewildering choice for investors.

In the past week, contracted exit prices on assured tenancy schemes have risen in the rush to tempt investors. Exits on fully cash-backed schemes have moved up a penny or two to 121-122p for every pounds 1 invested. But the highest returns are offered by schemes without or with only partial cash or bank backing. High exit prices indicate higher risk.

Eastern Counties Homestart Option, a pounds 2m issue sponsored by the stockbrokers Teather & Greenwood, is offering a 130p contracted minimum exit backed by a 35 per cent Bank of Scotland guarantee. This equates to 15.66 per cent a year tax-free for 40 per cent taxpayers, who pay only 60p per pounds 1 share. Investors will participate fully in any capital gain above the exit price.

Sunley Secure II, a pounds 1m scheme, is also offering a contracted minimum exit of 130p underwritten by Sunley Holdings, the family-owned property company. There is no bank guarantee. Investors will receive half of any gain above the contracted exit price.

Flexit 2, a pounds 7.7m scheme from Richard Ellis Venture Consultants and Anglia Polytechnic University, is a variation on university-assured tenancies, running for at least five years and potentially up to 31 years. If Anglia buys the BES company after five years, the exit equals 128p not backed by cash or bank guarantee. If Anglia does not buy, investors receive 29p and tax-efficient rental income up to 14 per cent net a year for top-rate taxpayers.

Accumulus Hallam II, a pounds 5m issue sponsored by Terrace Hill Capital in conjunction with Sheffield Hallam University, is paying a contracted exit of 125p with 50 per cent cash backing.

Second Magdalen College, Oxford BES, raising pounds 7m through the sponsor Hodgson Martin, is relying on the standing of the college. It is paying an exit of 123p with no cash backing or bank guarantee.

At the lower end of the exit-price spectrum, Bessa Springboard, from the sponsor Close Brothers and Springboard Housing Association, is paying a contracted exit of 120p fully cash-backed. Alternatively, the interest rate protection plan offers a fixed return of 80p plus a variable return based on upward rate movements.

The Aegis VI BES, from English Churches Housing Association and Matrix Securities, is also fully cash-backed and will pay an exit of 121p.

Exit prices versus security of backing is not the only issue. Mr Percival points out that the Inland Revenue is getting tougher by the day. Although provisional tax relief has been granted before new schemes go live, he suggests that issues with inexperienced or no sponsors run a greater risk of having final tax clearance refused.

Investors, especially PAYE taxpayers, will be affected by timing. They will qualify for relief in their tax coding from next April if they invest in schemes already trading but taking money now.

They should also make sure that shares in their chosen scheme are due to be allocated before 30 November, in case the Chancellor abolishes BES from the Budget to avoid the last month's rush of tax avoidance.

For more entrepreneurial investors, City North 4 is an assured tenancy BES without a contracted exit but looking for net income returns of 25 to 38 per cent over five years.

On the commercial front, HarleyScreen, a pathology lab offering walk-in HIV testing, is launching a second BES via Matrix Securities. If directors obtain an exit of 175p or more after five to six years, they receive 25 per cent of the share price achieved. Less than 175p and directors earn no bonus.

Golden Hands BES, a dental payments plan giving discounts to members and sponsored by MMI, aims for an exit of 150p after five years. Directors are rewarded only if targets are met.

(Photograph omitted)

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