MP wages war on BES arrangements: Vivien Goldsmith looks at amendments to the Finance Bill proposed to end tax relief on loan-back deals

Click to follow
AN MP is attempting to make all Business Expansion Scheme loan- back arrangements set up since the beginning of the year invalid.

Norman Lamont announced in the Budget that tax relief would no longer be available when BES investors used the shares as backing for a loan.

Schemes that allowed non-recourse loans - the debt can only be recovered from the value of the shares - offered attractive, certain returns to investors without the full five-year wait under normal BES rules.

Higher-rate taxpayers got 40 per cent tax relief on an investment that could be unwound after just six months. Some pounds 650m has been invested in these schemes since September.

Now Michael Stern, Tory MP for Bristol NW and a practising accountant with Cohen Arnold & Co, has put down an amendment to the Finance Bill. It would disqualify those taking loans using BES shares as security from tax relief on BES companies formed after 31 December.

'This is a tax dodge. We're back to the 1960s and 1970s. I lived through the heyday of tax avoidance and I don't want to see it again.

'I had a flood of letters about these schemes at my office saying, in effect, 'grab it while the gravy is hot'. A large part of the returns on offer came from the tax relief.'

He is also putting down another amendment to stop loans used as a device to change the timing of a disposal, say of shares in a private company, to mitigate capital gains tax.

The amendments should be debated next month.

If they go through, investors who were intending to unwind their investments after six or 12 months will have to stay in the schemes for five years to make a profit. If they leave earlier they will face a loss.

The schemes were used by mortgage lenders to dispose of repossessed properties. The homes were bought by the BES company and rented out on an assured tenancy basis. After five years the houses were sold and the capital returned to investors.

The first loan-back scheme arranged for the TSB's Mortgage Express by BES specialists Johnson Fry raised pounds 58m. It offered to pay 76p for every 100p investment after just one year. But in the meantime higher-rate taxpayers would have received a 40p rebate, making a return of 20.6 per cent in one year, equal to a 34.3 per cent gross return. If the investment was held for the full five years the return would drop to 13.8 per cent (23 per cent gross).

Other schemes quickly followed - Bellway Homes backed by Barclays, and schemes for National & Provincial, Bradford & Bingley, Leeds Permanent, Bristol & West and Britannia. Most sold out within hours.

Charles Fry, who is credited with inventing the wrinkle, said: 'Investors will be absolutely apoplectic if they invested on one basis and find that things have been changed.

'You can't change the rules and back-date them. If you buy ICI shares and want to borrow against them it's your affair. It's got nothing to do with tax legislation.

'Many amendments may be put down on the Finance Bill, but that doesn't mean they will all go through.'

David Toplas, a director of Terrace Hill Capital, sponsor of Accumulus III, said: 'We are not happy with the proposed amendments. Retrospective legislation is unfair to investors.'

The Gracechurch BES sponsored by Barclays, and National Westminster's Homeshare scheme, both have six- month loan schemes that offer annualised returns of 30 per cent.

But their BES status is being challenged by the Inland Revenue on the grounds that the shares were not allocated to investors until Budget day. The Chancellor made the loan-back disqualification effective from the midnight before Budget day.

Business Expansion Schemes are due to end at the end of the year.

Looking for credit card or current account deals? Search here