Personal Equity Plans: A tax-free investment comes with qualifications

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The Independent Online
ONLY managers approved by the Inland Revenue can offer PEPs to investors, whether they are managed funds - that is, unit or investment trusts offered in a PEP - or self-select PEPs where the investor chooses the investments held.

Currently you can invest up to pounds 6,000 in a general PEP in any tax year, plus up to pounds 3,000 in a single-company PEP.

The first category includes managed, self-select and corporate bond PEPs, while with single-company PEPs you may only invest in the shares of one company.

Remember, however, that these figures are maximums. While you can't carry forward unused PEP allowances, you can invest lump sums of less than pounds 6,000 or pounds 3,000 each year. Also, many managers offer regular savings plans through which you can invest as little as pounds 20 a month in a PEP.

All income and capital gains on investments held in PEPs are tax free. Various investments qualify, including shares issued by companies based in the European Union, corporate bonds and unit and investment trusts that invest at least half their assets in other qualifying investments. You can assume a managed PEP meets the rules.

On qualifying investments, the new Individual Savings Accounts (ISAs) will be more flexible than PEPs. You will still be allowed to hold all investments now qualifying for PEPs. ISAs may also hold bank and building society accounts, national savings products, most unit and investment trusts and life insurance products, including friendly society policies.

It will also be possible in each tax year to buy the components of an ISA from different providers.

Otherwise, ISA rules will be meaner than those for PEPs. Apart from a special concession in 1999/2000 when you can put pounds 7,000 into an ISA, including pounds 3,000 into a cash deposit, you will only be allowed to invest up to pounds 5,000 a year in an ISA, of which no more than pounds 1,000 may be in cash deposits and no more than pounds 1,000 in life insurance.

The Government's original plans for transferring PEPs into ISAs and restricting tax relief to pounds 50,000 had brought howls of protest. The Association of Unit Trusts and Investment Funds director-general, Philip Warland, said: "The majority of PEP investors are not rich ... their reasonable expectations would be betrayed by these proposals."

What angered PEP providers most, however, was the retrospective nature of ISA plans - some investors would lose relief on investments they had been told were tax-free forever.

q Contacts: Association of Investment Trust Companies, 0171-282 5555; Association of Unit Trusts and Investment Funds, 0171-831 0898; Association of Private Client Investment Managers and Stockbrokers, 0171-247 7080.

q David Prosser is features editor of `Investors Chronicle'.

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