Eyes on a foreign fortune

PEP-able funds Alison Eadie on the perks and pitfalls facing people with a taste for an overseas portfolio

THE ORIGINAL concept behind Personal Equity Plans was to extend share ownership of British companies, but rules have been relaxed to the point that it is possible to build up a strong overseas PEP portfolio and even have a PEP with no UK content. Investors are now free to invest the full £6,000 a year general allowance in shares of companies in the European Union. Those wanting to go further afield can invest in qualifying Peps that have at least half of their investments quoted on EU stock exchanges.

Unit and investment trusts with more than half their investments outside the EU are deemed non-qualifying, but investors may put £l,500 a year of their PEP allowance into them. The rest must go into qualifying funds with the same manager.

The dangers of roaming the globe too freely, however, have recently hit home with PEP managers. After long negotiations with the Inland Revenue, some managers have agreed to pay capital gains tax for the tax year 1993/94 on investments they thought were tax free. The Revenue says the issue is not yet cut and dried.

The misunderstanding arose over emerging markets. PEP managers were investing accord-ing to a list of approved securities markets from the regulating Securities and Investments Board. The list included Mexico, Malaysia, South Korea and Thailand, but the Revenue's list of recognised overseas stock exchanges excluded these four markets. The Revenue added them last October. Mexico, in particular, attracted large sums of foreign investment that year.

The Revenue has levied tax on unrealised capital gains, according to calculations on the number of unit holders or shareholders, their average investment and average gain or loss.

Both AUTIF (Association of Unit Trusts and Investment Funds) and AITC (Association of Investment Trust Companies) have settled with the Revenue. Philip Warland, director general of AUTIF, described the settlement as sensible and said only fund managers had to pay. "The PEP allowance of individual investors was unaffected, even though people invested in funds that were technically not PEP-able."

In future, the Revenue will add exchanges to its list if they apply for recognition and provided they have sufficient liquidity and proper regulation.

For the moment, however, emerging markets such as Brazil, Argentina, Chile, China, India, Pakistan, Taiwan, Israel and the Central European countries are not on the Revenue's list. This means that any PEP-able emerging markets trust must keep less than 50 per cent of its assets in these markets and more than 50 per cent in "recognised" markets.

Emerging markets trusts are also non-qualifying PEPs, so investors can only put £1,500 a year into them.

The moral of the tale is avoid anything that strays too far from the straight and narrow. Chase de Vere, the independent adviser, warns that the consequences of a PEP being disallowed because it strayed too far from recognised markets could be substantial. "The investor may lose his entitlement to a PEP for the whole tax year," he said.

It is possible to gain quite a wide international exposure and stay comfortably within PEP rules. Fidelity's MoneyBuilder PEP is a fund of funds intended for first-time PEP buyers. It aims for long-term capital growth. More than half its invest-ments are in the UK and Europe, with the rest spread between South East Asia, Japan, the US and other world stock markets.

Guinness Flight's Global Privatisation PEP has 50 per cent of its assets in mainland Europe and the rest spread between the UK, Far East, Australasia and emerging markets. Several of the largest and oldest investment trusts fail the 50 per cent EU rule, having built their reputation on their ability to invest anywhere in the world. Rather than change their investment policy, managers have designed PEP selections to allow investors to use their full £6,000 allowance.

Foreign & Colonial Investment Trust, F&C's flagship trust launched in 1868, is one of four non-qualifying trusts in the F&C PEP. The others are Pacific, Smaller Companies and US Smaller Companies. For the top up, qualifying trusts are Euro-trust, German, Income Growth and F&C PEP, a specially designed trust mainly invested in UK blue-chip shares.

F&C's Latin American and Emerging Markets Trusts were once part of the non-qualifying offering, but were withdrawn due to the Inland Revenue dispute. No decision has been made to reinstate them.

Some overseas PEPs have performed handsomely. Chase de Vere's performance charts show that Europe did well in 1994. Morgan Grenfell's Europe Growth Trust turned £1,000 into £1,171.71, at a time when the UK stock market was falling.

Over five years, the top non-qualifying unit trust PEP was Gartmore Hong Kong, which turned £l,000 into £3,824.77.

Direct investment abroad by way of a self-select or advisory PEP is an option reoommended only for the highly sophisticated investor. The costs and the complexities of building up an adequate spread of investments are enough to convincingly deter all but the very brave.

Suggested Topics
Start your day with The Independent, sign up for daily news emails
ebooksA special investigation by Andy McSmith
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

Ann: Senior Finance Analyst

£45,000: Ann: My client is a FTSE 250 retailer based in Central London and the...

Anna Woodward: Reporting Analyst

£35,000: Anna Woodward: Are you excited about making an impact on a FTSE 250 b...

Anna Woodward: French Sales Ledger Clerk

£23,000 - £28,000: Anna Woodward: My client is aleading global manufacturer an...

Christine McCleave: Accounts Assistant

£22,000 - £25,000: Christine McCleave: Are you looking for a new opportunity a...

Day In a Page

HIV pill: Scientists hail discovery of 'game-changer' that cuts the risk of infection among gay men by 86%

Scientists hail daily pill that protects against HIV infection

Breakthrough in battle against global scourge – but will the NHS pay for it?
How we must adjust our lifestyles to nature: Welcome to the 'Anthropocene', the human epoch

Time to play God

Welcome to the 'Anthropocene', the human epoch where we may need to redefine nature itself
MacGyver returns, but with a difference: Handyman hero of classic 1980s TV series to be recast as a woman

MacGyver returns, but with a difference

Handyman hero of classic 1980s TV series to be recast as a woman
Tunnel renaissance: Why cities are hiding roads down in the ground

Tunnel renaissance

Why cities are hiding roads underground
'Backstreet Boys - Show 'Em What You're Made Of': An affectionate look at five middle-aged men

Boys to men

The Backstreet Boys might be middle-aged, married and have dodgy knees, but a heartfelt documentary reveals they’re not going gently into pop’s good night
Crufts 2015: Should foreign dogs be allowed to compete?

Crufts 2015

Should foreign dogs be allowed to compete?
10 best projectors

How to make your home cinema more cinematic: 10 best projectors

Want to recreate the big-screen experience in your sitting room? IndyBest sizes up gadgets to form your film-watching
Manchester City 1 Barcelona 2 player ratings: Luis Suarez? Lionel Messi? Joe Hart? Who was the star man?

Manchester City vs Barcelona player ratings

Luis Suarez? Lionel Messi? Joe Hart? Who was the star man at the Etihad?
Arsenal vs Monaco: Monaco - the making of Gunners' manager Arsene Wenger

Monaco: the making of Wenger

Jack Pitt-Brooke speaks to former players and learns the Frenchman’s man-management has always been one of his best skills
Cricket World Cup 2015: Chris Gayle - the West Indies' enigma lives up to his reputation

Chris Gayle: The West Indies' enigma

Some said the game's eternal rebel was washed up. As ever, he proved he writes the scripts by producing a blistering World Cup innings
In Ukraine a dark world of hybrid warfare and murky loyalties prevails

In Ukraine a dark world of hybrid warfare

This war in the shadows has been going on since the fall of Mr Yanukovych
'Birdman' and 'Bullets Over Broadway': Homage or plagiarism?

Homage or plagiarism?

'Birdman' shares much DNA with Woody Allen's 'Bullets Over Broadway'
Broadchurch ends as damp squib not even David Tennant can revive

A damp squib not even David Tennant can revive

Broadchurch, Series 2 finale, review
A Koi carp breeding pond, wall-mounted iPads and a bathroom with a 'wellness' shower: inside the mansion of Germany's 'Bishop of Bling'

Inside the mansion of Germany's 'Bishop of Bling'

A Koi carp breeding pond, wall-mounted iPads and a bathroom with a 'wellness' shower