Tax-free gambits not to be missed

Enterprise Investment Schemes look an extremely attractive investment now that the benefits have been beefed up
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The Independent Online
NOW is the time for all good men, and women, to come to the aid of their accountant. The end of the tax year looms, and some of the finest brains in the land are already working out how to minimise next year's tax bill. Inevitably, the specialist finance houses and tax advisers are always willing to guide your thoughts. Heavy hints in the form of glossy brochures are dropping through mail boxes describing arcane schemes to save on tax. Complex they may be, but it is often worth paying attention to them.

One wheeze that looks like being a considerable success in 1995, which you are unlikely to have come across before, is the Enterprise Investment Scheme (EIS). This was actually introduced in the 1993 Budget as the successor to the discredited Business Expansion Scheme. The aim, as with the old BES, was to encourage private investors to risk backing small businesses. The tax breaks offered by the Chancellor, however, were so measly that the idea was a flop - not a single EIS in 1994 reached its maximum subscription level.

So for 1995/96, the tax breaks have been beefed up to a point where they now look seriously attractive. Last week, schemes were announced to invest in businesses as diverse as a leisure park, a well-known restaurant group and a multimedia company. They all look like meeting their subscription targets.

Each scheme is allowed to raise a maximum of £lm and runs for five years. The tax breaks consist of 20 per cent initial income tax relief - not particularly attractive, you may think. But there is also provisional capital gains tax relief up to the full 40 per cent on any capital gain realised elsewhere as long as the money is put into an EIS. That adds up to a maximum tax relief of 60 per cent.

And there is more. At the end of the five years, all growth achieved on the back of the CGT relief is tax-free. You can then either pay back the deferred CGT (which in the meantime will have fallen in value thanks to five years of inflation). Or you can reinvest it in a new EIS to keep the relief going, as long as you do so within three years. In theory, therefore, you can defer the CGT indefinitely, and there is no limit to the amount of relief you can claim in this way.

One scheme is offered by Kite Multimedia Solutions, through the accountancy firm Blackstone Franks, with minimum individual subscriptions of £4,900. The shares are being offered at 70p which, says the company, is just about one times the projected 1997 earnings per share.

So what does KMS actually do? It is using the CD-ROM revolution as a way of providing information and education to the healthcare industry. Pharmaceutical companies, for instance, spend £8bn a year telling the doctors about their products. KMS's lead product is an "occupational stress management system" called Wellbeing which, it says, will provide a cost- effective remedy for corporate stress. This will be handy if KMS is correct in its claim that "Britain's workforce is perhaps the most stressed in the world".

Two other schemes are on offer this week. One is offered by Capital Ventures, the specialist finance group, in Kingston Park Leisure to develop and operate tennis, health and fitness facilities in Hull. A similar scheme was launched last year in Cardiff.

The other is offered by tax experts Mills & Reeve, under the name Insignia, to fund the expansion of the Pelican restaurant group. Pelican owns the Caf Pelican, the Caf Rouge and the Dome chains.

What makes these schemes different from KMS, however, is that they include a "contracted exit" - the return to investors is guaranteed in advance. The risk is, in theory, minimal.

Anyone investing in Kingston Park Leisure is promised a minimum payout of £l.50 per £1 share after five years and up to £2 a share if company performance is higher. A £2 payout, says Nigel Jealous, Capital Ventures's head of sales, is equivalent to a 30 per cent compound return per year. Even if Kingston Park Leisure is a complete flop, the payout is guaranteed by the Archer Group, a leisure company that is managing KPL's operations. And if Archer also goes bust, the payout is made by its parent, Dynamic Leisure, which is 26 per cent owned by Royal Bank of Scotland. So the security looks pretty good.

The payout on the Insignia EIS is £l.30 in cash or £l.32 in Pelican shares, guaranteed by Pelican. The company may of course go to the wall first, but it is expecting to double profits to £8m next year so its prospects seem healthy.

So here we have schemes offering tax relief and a guaranteed return. Does it not sound rather like the old fail-safe BES? Does it not even sound too good to be true? "It is too good to last," said one tax adviser last week. "The Government will probably close the tax loophole in two or three years." But until then, an EIS looks like an offer not to miss.

A longer-term scheme is another Capital Ventures offering of an Enterprise Zone Trust for industrial and office property in Sunderland. Each investor owns a slice of the property proportionate to his investment, which must last 25 years. Capital Ventures already manages 35 EZTs.

The scheme depends on tax breaks introduced in the 1980s to encourage the Government's enterprise zones. It offers up to the full 40 per cent income tax relief, with no upper investment limit.

A £100,000 investment, for example, would get a rebate of roughly £40,000. You can even gear up the investment by taking out a loan on which the interest is offsettable against the rent from the property.

As the investment is so long- term, it is probably not advisable purely for income tax relief. But it can be transferred to a "connected person", who becomes the beneficiary if you die, so it could be very useful in inheritance tax planning.