BES backers face end of term options

Many people with money held in residential business expansion schemes (BES) will be faced with the choice of what to do with their investments over the next few months as they come to the end of their five-year investment period.

Some will be offered the chance of selling their investments; others could remain invested in the property; while yet others will be given the option of exchanging their investments for shares in a property company floated on the stock market.

The last option has suddenly become more attractive after a change announced in the Budget that will allow investors to roll over their capital gains tax exemption from the BES to the new, floated company.

Investors will have to weigh this route against staying directly invested in property, in the hope that property prices will begin to rise again. A recent survey from TSB predicts that residential property prices will rise by 3.4 per cent next year.

Thousands of people poured millions of pounds into residential BES because they were offered income tax relief on the investment and capital gains tax relief on the investment returns.

The catastrophic fall in the price of residential property over the last five years has meant that, for many, the gains made on the tax break have been nearly wiped out. As these BES companies come to the end of their five-year life, many investors are now faced with investments that are illiquid and worth much less than when the BES company bought them.

Artesian Estates was one of the first residential business expansion companies to go for a float in a bid to make the assets more liquid. It currently has a market capitalisation of £13.5m.

Some investors in Artesian I BES are now shareholders in the new company. Richard Bream, chairman of Artesian Estates, said that people who had money invested in the first Artesian Bes scheme were issued with shares in proportion to the value of their original investment.

He was able to offer this because the depreciation in the value of the property was offset by the rental income coming through. However, the shares are now 25 per cent down in value on issue price.

Mr Bream said that if investors had wound up the schemes they would have also have had to take a 15 to 20 per cent loss, but it could take some time for the property to be sold and their investment realised.

He added: "We are currently in talks with BES companies that have £60m of investment with the aim of taking them over and adding to the market capitalisation of the company."

Kerrington, another BES company, has a number of schemes that it intends to float off over the next few months. Gerry Lee, the company's managing director, said: "We are a completely different company to Artesian. We have the ability to pay out large dividends drawn from the rental income on the property."

Johnson Fry, one of the biggest providers of BES schemes, gave its investors the option of staying invested or getting some of their original investment out. Charles Fry, chairman, said that most investors had chosen to extend the life of the BES companies for another three years.