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
Arts and Entertainment
Sydney and Melbourne are locked in a row over giant milk crates
Kenny Ireland, pictured in 2010.
peopleActor, from House of Cards and Benidorm, was 68
A scene from the video shows students mock rioting
newsEnd-of-year leaver's YouTube film features staging of a playground gun massacre
A family sit and enjoy a quiet train journey
voicesForcing us to overhear dull phone conversations is an offensive act, says Simon Kelner
i100This Instagram photo does not prove Russian army is in Ukraine
Life and Style
Martha Stewart wrote an opinion column for Time magazine this week titled “Why I Love My Drone”
lifeLifestyle guru Martha Stewart reveals she has flying robot... to take photos of her farm
sportVan Gaal has £500,000 video surveillance system installed to monitor Manchester United players
View from the Llanberis Track to the mountain lake Llyn
Du’r Arddu
environmentA large chunk of Mount Snowdon, in north Wales, is up for sale
Morrissey pictured in 2013
Arts and Entertainment
The Secret Cinema performance of Back to the Future has been cancelled again
filmReview: Sometimes the immersive experience was so good it blurred the line between fiction and reality
ebookA unique anthology of reporting and analysis of a crucial period of history
Life and Style
The director of Wall-E Andrew Stanton with Angus MacLane's Lego model
gadgetsDesign made in Pixar animator’s spare time could get retail release
peopleGuitarist, who played with Aerosmith, Lou Reed and Alice Cooper among others, was 71
Tyred out: should fair weather cyclists have a separate slow lane?
environmentFormer Labour minister demands 'pootling lanes' for women cyclists
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

1st Line Support Technician / Application Support

£20000 - £24000 per annum: Harrington Starr: A leading provider of web based m...

Team Secretary - (Client Development/Sales Team) - Wimbledon

£28000 - £32000 per annum: Ashdown Group: Secretary (Sales Team Support) - Mat...

Accountant / Assistant Management Accountant

Competitive (DOE): Guru Careers: We are looking for an Assistant Management Ac...

Senior Investment Accounting Change Manager

£600 - £700 per day + competitive: Orgtel: Senior Investment Accounting Change...

Day In a Page

Dress the Gaza situation up all you like, but the truth hurts

Robert Fisk on Gaza conflict

Dress the situation up all you like, but the truth hurts
Save the tiger: Tiger, tiger burning less brightly as numbers plummet

Tiger, tiger burning less brightly

When William Blake wrote his famous poem there were probably more than 100,000 tigers in the wild. These days they probably number around 3,200
5 News's Andy Bell retraces his grandfather's steps on the First World War battlefields

In grandfather's footsteps

5 News's political editor Andy Bell only knows his grandfather from the compelling diary he kept during WWI. But when he returned to the killing fields where Edwin Vaughan suffered so much, his ancestor came to life
Lifestyle guru Martha Stewart reveals she has flying robot ... to take photos of her farm

Martha Stewart has flying robot

The lifestyle guru used the drone to get a bird's eye view her 153-acre farm in Bedford, New York
Former Labour minister Meg Hillier has demanded 'pootling lanes' for women cyclists

Do women cyclists need 'pootling lanes'?

Simon Usborne (who's more of a hurtler) explains why winning the space race is key to happy riding
A tale of two presidents: George W Bush downs his paintbrush to pen father’s life story

A tale of two presidents

George W Bush downs his paintbrush to pen father’s life story
Restaurateur Mitch Tonks has given the Great Western Pullman dining car a makeover

The dining car makes a comeback

Restaurateur Mitch Tonks has given the Great Western Pullman dining car a makeover
Gallery rage: How are institutions tackling the discomfort of overcrowding this summer?

Gallery rage

How are institutions tackling the discomfort of overcrowding this summer?
Louis van Gaal has £500,000 video surveillance system installed to monitor Manchester United players

Eye on the prize

Louis van Gaal has £500,000 video surveillance system installed to monitor Manchester United players
Women's rugby: Tamara Taylor adds fuel to the ire in quest to land World Cup

Women's rugby

Tamara Taylor adds fuel to the ire in quest to land World Cup
Save the tiger: The day America’s love of backyard tigers led to a horrific bloodbath

The day America’s love of backyard tigers led to a horrific bloodbath

With only six per cent of the US population of these amazing big cats held in zoos, the Zanesville incident in 2011 was inevitable
Samuel Beckett's biographer reveals secrets of the writer's time as a French Resistance spy

How Samuel Beckett became a French Resistance spy

As this year's Samuel Beckett festival opens in Enniskillen, James Knowlson, recalls how the Irish writer risked his life for liberty and narrowly escaped capture by the Gestapo
We will remember them: relatives still honour those who fought in the Great War

We will remember them

Relatives still honour those who fought in the Great War
Star Wars Episode VII is being shot on film - and now Kodak is launching a last-ditch bid to keep celluloid alive

Kodak's last-ditch bid to keep celluloid alive

Director J J Abrams and a few digital refuseniks shoot movies on film. Simon Usborne wonders what the fuss is about
Once stilted and melodramatic, Hollywood is giving acting in video games a makeover

Acting in video games gets a makeover

David Crookes meets two of the genre's most popular voices