Build company at taxman's expense: Individuals as well as institutions can take advantage of Business Expansion Schemes, writes Brian Friedman

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The Independent Online
THE BUSINESS Expansion Scheme is due to be abolished on 31 December 1993. We can expect a surge of activity before then, as BES companies are marketed on a 'buy now while stocks last' basis.

The vast bulk of BES money goes into sponsored schemes put together by financial institutions, but there is an increasing recognition that BES schemes can be established on a do-it- yourself basis.

How do you set up your own BES scheme? First, you will need to find a number of co-investors, because one BES requirement is that relief is allowed only to investors holding 30 per cent of the share capital or less. And for these purposes, you will be treated as being associated with your spouse, parents, children or any business partner. But you are not treated as being associated with brothers and sisters. In practice, a group of four friends is probably the most common situation.

The four of you can invest up to pounds 40,000 each in the new company under the BES. Given that a husband and wife each has a pounds 40,000 limit, four husband- and-wife teams could invest pounds 80,000 per couple and so establish a company with an initial capitalisation of pounds 320,000.

The BES company can either carry on a qualifying trade or purchase property for letting under the assured tenancy scheme. In essence, it is therefore possible to purchase property through the BES at 40 per cent discount, courtesy of the Inland Revenue.

To make a more substantial property company, it may also be attractive to borrow from a bank, for example on a pound- for-pound basis. Even in today's climate, most banks will be happy to lend as long as they are providing only 50 per cent of a property investment. Repaying the interest should not be a problem, as the rental income should cover it on a property company which is only 50 per cent geared.

If you wish to expand further still, the BES company could make a rights issue immediately after 5 April 1993. This can effectively double its size. The investment put in by the four sets of shareholders doubles from pounds 320,000 to pounds 640,000. If equity is met again by an equivalent level of borrowing, the funds available for investment in property will be pounds 1.28m.

Clearly, any potential investor will need to take professional advice on the legal and tax structuring of the new BES company. In addition they may need help in making their property investment. However, all this seems to be a small price to pay for the opportunity of creating a substantial property investment company.

The eventual sale of shares in the BES company will also be free from capital gains tax, provided the company has retained its qualifying BES status for a period of four years. After that a company can expand into any area it wishes without jeopardising the eventual sale of shares free of capital gains tax.

Investors could build up a company initially as a BES property company but subsequently develop it into any business they like and retain the tax- free status.

Brian Friedman is a tax consultancy partner with Stoy Hayward and managing director of Stoy Benefit Consulting.