Bars prove stars in tax-relief plan: The Business Expansion Scheme has had mixed results, writes Conal Gregory

Click to follow
Investing in Business Expansion Scheme companies has mostly been a high-risk affair, but some investors have done well out of the scheme and will lament its passing at the end of next year.

The Business Expansion Scheme was launched in 1983 to encourage small, private investors to provide venture capital to unquoted companies. The scheme is to be phased out by the end of 1993.

For the past four years the scheme has been skewed towards encouraging investment in companies letting property. But many of the original BES companies, operating in a wide variety of industries, are now 'maturing'.

The big attraction of BES investment was tax relief on the initial investment - at your highest rate - and no capital gains tax liability.

But to receive the tax benefits it is necessary to leave your money untouched for five years. At the end of that period the companies and their sponsors normally look for ways to let the investors realise their gains - or losses.

Sometimes they will match buyers to sellers, and in some cases companies are bought out.

For investors who can think longer than five years, it may be better not to push companies that are having trading difficulties but to let them weather the current economic storm.

One of the stars over the past five years has proved to be Chester International Hotel, sponsored by Capital Ventures. In March 1987 pounds 4m was raised and on 9 April this year, Queens Moat Houses offered pounds 1.68 for each pounds 1 share.

The 800 investors have seen a 320 per cent increase over net costs, equivalent to a 33.2 per cent compound annual growth rate to top-level taxpayers.

While tourism has fared well, shipping has proved more volatile. Bromley Shipping was one of three BES companies sponsored by the London & Edinburgh Trust. Its fifth year of trading to the end of March saw a loss of over pounds 409,500, after a loss the previous year of pounds 169,666.

Bromley Shipping, which attracted 530 investors, has specialist coasters that operate around the smaller UK ports and up the Rhine. For those who now wish to realise their stock, the company has introduced an unofficial matched bargain market through Capital Ventures of Cheltenham.

Last week Capital Ventures wrote to a number of shareholders in Bromley Shipping who are looking to sell, explaining that it had identified a buyer, but the price being offered is 20p per share against the pounds 1.25p that investors originally paid.

Edinburgh Tankers has two vessels fully employed but the daily freight rate returns have been falling month by month. Johnson Fry investors subscribed pounds 15.6m. They have seen a loss for the year to March 1991 of over pounds 2.9m on a turnover of pounds 4.7m. Charles Fry says the 4,137 investors will be 'lucky to get all their money back with the current downturn in shipping'.

Property was once a popular BES investment and investors have had mixed experiences.

Cavendish Constructors, a firm of building contractors working mainly in southern England, attracted some 600 investors. The issue was sponsored by Smith & Williamson, a private bank and firm of chartered accountants.

Cavendish lost pounds 134,706 this year but a liquidator has been appointed and this should result in a distribution of at least 40p per share, the net cost of the investment to a top-rate taxpayer. Gareth Pearce of Smith & Williamson hopes that a further 40p will be raised when properties held by Cavendish are sold.

Less happily, Dix Belgravia, a BES property development company that required a minimum pounds 3,000 investment, went into receivership in February. There will be no payment.

Some BES firms have seen little demand to realise stock. Jasmin Electronics is typical. It attracted some 600 investors. Based near Nottingham, Jasmin employs 180 people, manufacturing closed-circuit television sets and other hi-tech products.

The entertainment and dining-out sector is likely to have proved a good choice for the BES investor.

Five years ago Johnson Fry sponsored Cafe Inns and Country Resort Hotels. Cafe Inns, which runs pubs, has reported profits more than double the budgeted level.

The 745 investors have recently been canvassed as to their views on the most appropriate BES exit route. It looks encouraging, with net assets of over pounds 4.4m, up from pounds 2.4m the previous year.

Country Resort Hotels owns four hotels: Horse Shoe Inn, Arundel Resort Hotel, Hickstead Resort Hotel and Marwell Resort Hotel. All the properties have been managed by Resort Hotels, which is publicly quoted and has other trading links with Country Resort. Investors have not been surprised to learn that it is proposed they should receive 1.4 shares in Resort for each one in Country Resort Hotels later this year, a value currently of some 82p.

(Photograph omitted)