Special Report on Peps and Tax Planning: Luring sophisticates: Alison Eadie reports on the appeal and development of Euro-PEPs

THE EURO-PEP made its debut at the start of last year but as yet has appealed only to a small audience.

Investing on the continent of Europe is recommended only for more sophisticated investors, who have already built up a substantial UK portfolio. The low income from many European stocks means income tax savings are negligible. The tax advantages lie in capital gains tax exemption, which applies only to investors with large enough portfolios to risk breaching their CGT threshold.

Investors may use their full pounds 6,000 allowance to buy EC shares or EC unit and investment trusts. The direct share facility has not proved successful and the EuroPep has become almost entirely a collective vehicle.

Chase de Vere's performance charts show some of these collective vehicles with excellent growth records. The top five performing unit trusts over a five-year period include four European trusts. Although somewhat irrelevant because Euro-PEPs are so new, the performance does indicate that good returns can be made.

Buying directly in Europe, if done at all, can only be done through stockbrokers. Scottish Widows and Barings were two of the very few fund managers which included European shares in their PEPs and both now offer only collective vehicles. David Graham, group unit trust manager at Scottish Widows, said it was better to give clients a bigger spread and lower charges through a collective vehicle. Scottish Widows used to choose four continental equities for PEP clients, but the annual management charge of 1.5 per cent carried VAT. The European unit trust makes the same management charge but with no VAT.

The high price of continental shares - they can cost pounds 200 each - meant allocating the right number per client was a problem. Unit trusts can be split proportionately between clients. Selling also presented difficulties because orders might have to go to a stockbroker to sell just two Deutsche Bank shares, leading to colossal charges, Mr Graham said.

The future performance of European trusts is uncertain because of the gathering recession on the continent. The Prudential is negative in the short term and is underweight in Germany and countries linked to the German economy. It is overweight in countries such as Switzerland and the Netherlands with high levels of exports to the UK and US, which are emerging from recession.

Steven Bates, European fund manager at Flemings, believes that markets such as France which are sensitive to interest rate reductions should perform well.

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