Investors thwarted by loan-back ban: Change in BES rules wreaks havoc

HUNDREDS of people who tried to invest in loan-back Business Expansion Scheme issues just before the Budget will have their cheques returned, writes Neasa MacErlean.

The Chancellor, Norman Lamont, wreaked havoc on a handful of BES schemes by introducing retrospective legislation. The retrospective element extended back only 16 hours but it was enough to cause embarrassment to some scheme sponsors and disappointment to many would-be investors.

From the midnight before Budget day, Mr Lamont decreed that all tax relief would be taken away from BES investors who took out loans on the back of BES investments.

Two schemes offering some of the most attractive terms were hit by the measure. All funds are being returned to investors who tried to invest in the Oriel College BES issue. The scheme had offered the best six-month loan- back terms (at 77p per pounds 1 investment) but the deal was not signed by midnight on Monday.

About 300 people who between them tried to invest pounds 3m in another innovative offer, the Yorkshire Building Society Flexible scheme, have had their cheques returned. The subscription lists were closed just before midnight on Monday to play safe, after applications worth pounds 9m had been accepted from about 750 investors. Those that arrived on Tuesday are being returned.

Allenbridge Group, a firm of BES advisers, believes that, while Mr Lamont may have limited the potential for innovation he has not killed off the demand. 'I see the market as being very active still,' said Anthony Yadgaroff of Allenbridge. 'But it's just going to be straight, vanilla types of BES now.'

Competition will now focus on the return the schemes can offer at the end of the five-year term. Allenbridge Group predicts guaranteed exits going up to pounds 1.35 or pounds 1.40 per gross pounds 1 investment. The big question for investors, it believes, will be how secure the guarantees are.

Johnson Fry, the leading BES sponsor, believes that the exit range will hover around pounds 1.05 to pounds 1.15. It predicts that another pounds 60m of BES funds will be raised by the end of the tax year. But the guaranteed exits after five years will be set to match prevailing competitive conditions. Exit prices could easily jump a few pence in a matter of days.