New BES issues offer high one-year returns: Neasa MacErlean on a profound change in the Business Expansion Scheme market

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The Independent Online
A REGULAR feature of the personal finance calendar each year is the appearance of new Business Expansion Schemes in September.

But this month's offerings will change the market profoundly, according to BES sponsors and analysts. BES holdings, they say, can in practice now be regarded as one-year investments rather than the five-year investment required by the Inland Revenue. They can also virtually guarantee a one-year return of more than 20 per cent to higher-rate taxpayers.

The issue credited with changing the market is Johnson Fry's pounds 50m Mortgage Express Flexible Growth Scheme 1992, offered in co-operation with TSB. Under the scheme, higher-rate taxpayers can make a return of 20.7 per cent in a year. On a pounds 10,000 gross investment they would receive pounds 4,000 tax relief, creating a net of pounds 6,000. A year after the investment, the TSB subsidiary Mortgage Express will make a loan to the investor of 76 per cent of his or her shareholding - in this case pounds 7,600.

The TSB loan will be made without questions to all investors in the scheme. As a non-recourse loan, it will only be paid off from the investment on which it is secured. If the underlying investment (in houses repossessed by TSB) fails to flourish, there will be no other recourse against the BES investors. And if all goes according to plan the fixed-rate loan with rolled-up interest will be paid off by the proceeds of the property buy-back at the end of the five years. Either way the investor need not be concerned after the first year.

(For investors who do not want to take the loan, TSB will guarantee a final repayment of pounds 1.20 for every pounds 1 invested.)

Other BES sponsors are already trying to negotiate similar arrangements with large banks. These might not come on to the market before the 5 October deadline for carrying back pounds 5,000 of BES investments into the previous tax year, but they will probably be in place for March when another spate of BES issues will be launched.

The Accumulus BES (an investment in residential housing) is arranged in conjunction with Standard Chartered Bank. Standard Chartered will consider making loans to investors after one year, but otherwise it guarantees to pay back pounds 1.25 after five years for every pounds 1 invested now - an annual return of more than 14 per cent for higher-rate taxpayers.

Following the failure of some BES schemes in the past and their concentration in the property market, the most popular schemes are likely to be those in which a final return is guaranteed. In the House the Homeless of London (Greenwich) plc scheme, the sponsors hope to raise pounds 5m to provide more than 70 permanent homes for homeless families. The Peabody Trust is guaranteeing a final return of pounds 1.26 per pounds 1 invested.

BES schemes lose their raison d'etre at the end of next year, when the tax relief on the annual maximum investment of pounds 40,000 is removed. The Allenbridge Group, a BES analyst, predicts that another 200,000 higher-rate taxpayers could be attracted into the market, in which about 40,000 individuals are at present taking part.

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