Special Report On Personal Equity Plans: Good way to pay school fees

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INVESTMENT trust zero dividend shares are one of the best- kept investment secrets. They are particularly useful to higher-rate taxpayers because they pay no income. Instead, investors get their return in the form of a capital payment when the trust is wound up.

Zero dividend shares offer capital appreciation at a relatively low risk, although the return is not guaranteed. This is because a zero dividend share can only meet its repayment target if the investment trust to which it is linked has enough money in the kitty on the day the trust is wound up.

Take the example of Scottish National's zero dividend shares. On 18 February, you could buy these shares at 208.5p. Scottish National is wound up in September 1998 when the zero dividend shareholders get 325p a share, a return of 8.3 per cent a year. Scottish National's assets would have to fall by an average of 2.9 per cent a year between now and the winding-up date before the final repayment was in danger.

Zeros are a good way to plan for school fees. There are 25 zeros to choose from with repayment dates ranging from January 1995 with Gartmore Value to January 2003 with Jos, so it is possible to choose shares that are repaid during the years in which school fees are due.

The benefit of a PEP for most is the offer of a tax-free income from investments. Zeros do not pay an income so most investors would not benefit from putting them into a PEP. But zeros are liable to capital gains tax, so investors who pay this tax should consider putting zeros into a PEP. Several zeros are available through the managers' own PEP: Fleming Income & Capital; Scottish National; I & S Optimum Income; and Jos and Kleinwort High Income.