Your Money: BES turned to repossessions

Click to follow
The Independent Online
THE Business Expansion Scheme was set up to persuade investors to take a punt on fledgling companies.

But human nature being what it is, the risks have been damped down till they are nearly invisible, although full tax relief remains.

The BES in its current form is due to end in December, but the Budget must surely come up with a new version that directs funds into productive industry.

In the meantime, the scheme has been inadvertently diverted into a useful corner of the economy: repossessed homes.

First, building societies set up schemes, and now the banks are about to follow. Barclays is launching a pounds 25m BES this week to mop up its repossessed properties.

At the end of five years, investors will get back 105p for every 100p invested. That may not sound terrific, but add in the tax relief of 40p in the pound and it plumps up to a handsome enough annual return of 10.9 per cent.

The new twist on these schemes is a loan after six months. This magically transforms Barclays' Gracechurch investment into a 30 per cent return after six months for higher-rate taxpayers. The loan is ring-fenced, so Barclays can only use the proceeds from the shares to repay the debt.

And on top of a tidy profit, there is just room for a tiny glimmer of self satisfaction that a tiny nudge-start may be given to the property market by mopping up some of the repossessed homes weighing down the property market.

THE heat generated by the leasehold reform proposals in the Household and Urban Development Bill is not unnaturally caused by the friction of opposing self-interests.

Last week, the Duke of Westminster, who owns chunks of Belgravia, resigned from the Tory Party over the issue. He does not want to be forced to sell any of his freeholds - at any price.

It is not that there is any question of these freeholds being sold at below market price.

The alchemy in the arithmetic is caused by the value of the parts - the freehold and the leasehold interests - adding up to more than the sum of the parts. The value added by bringing the two interests together, called the marriage value, is likely to be split between the landlord and the leaseholder under the legislation. So the landlord gets more than the open-market value of the freehold.

In many cases, homeowners will not be able to afford to exercise the right to buy the freehold.

Much depends on the attitude of lenders. Given the mood of caution among banks and building societies, they may be reluctant to advance loans. Indeed, much of the problem with the present situation has been thrown into sharp focus by lenders who not only want to see leaseholds last as long as mortgage loans, but 25 years beyond. This leap-frog view then starts working its way backwards - so someone seekinga 25-year loan needs a minimum of 50 years to run on the lease - and then begins thinking that anyone who buys will also want to see 50 years to go. So it soon seems that anything less than 75 years will not do.

When the Duke lamented that a whole form of tenure was in danger of being wiped out, his sorrow but not his conclusion was misplaced. It is a form that sits unhappily between full home ownership and renting and will probably pass away.

But even if the Bill is passed in its current form, many flat and house owners will still be leaseholders - such as those in blocks where there is not a quorum of those eligible to enfranchise, or where the vote goes against it.

The proposal that all houses with leases of more than 21 years should be freed from the leasehold tie was rejected in the Commons. So houses (like mine) where the ground rent is deemed to be so high that it constitutes rent are also excluded from enfranchisement, even though this just provides a spur to landlords to put in high ground rents.

As soon as enfranchisement becomes the norm, those leaseholders remaining will find they have been marooned on a desert island with no buyers in sight.

SCOTTISH Widows says it is considering sending dummy customers to meet its sales force to see what really goes on beyond the training manual.

The threat may be a good way of making sloppy or over-enthusiastic salesmen toe the line, but perhaps Scottish Widows should just tune in more acutely to the real customers.