The most obvious distinction between PEPs and Loi Monory plans is the lack of tax relief on entry. A less obvious but ultimately more significant difference was that Loi Monory plans were invested via a type of unit trust, whereas Mr Lawson was determined to create a 'share-holding democracy'.
At first there was to be no unit or investment trust investment at all, but by the time the rules were introduced, a provision for 25 per cent of the contribution to be invested in qualifying trusts had been included. For investors there were two problems. The charges could eat substantially into the tax relief on the dividends, so unless the investor was liable to capital gains tax, the PEP took some time to provide any benefit. Second, the amount of money invested, pounds 2,400, was not enough to ensure a good spread of shares; the dealing costs made buying more than four or five shares impractical.
Apart from the Loi Monory, the Inland Revenue quoted the US Individual Retirement Account as one of the overseas plans contributing to the development of PEPs. These allow quite small premiums qualifying for a tax deduction, but are often actively managed by the investor picking individual stocks.
Mr Lawson expected the same to happen here, but it seemed he forgot that the stockbroker culture is very different in the United States. A US broker cuts his teeth by 'cold-calling' - telephone selling to people he has never met. In Britain, only the 'over the counter' market makers did that in 1987; cold-calling was left to insurance salesman.
In the heady days of early 1987, this did not seem to matter. In all, a quarter of a million plans were sold. But the stock market crash of 1987 changed investors' perceptions. No longer were shares a sort of high-performing building society account; investors realised, in the words of Tony Wickenden of the tax advisers Technical Connection, that 'share prices can fall as well as plummet . . .' As a result, sales of PEPs fell dramatically in 1988 to 20 per cent of 1987's figures, and major players such as TSB, Fidelity, Framlington and Barclays announced that they were pulling out or delaying the introduction of their 1989 PEPs.
Bowing to pressure, the Chancellor in 1989 announced that the first pounds 2,400 invested into a PEP could go into qualifying trusts, and PEPs took off again. This year's Budget permitted the full PEP investment of pounds 6,000 to be in qualifying unit or investment trusts. Despite pressure from groups supporting wider share ownership for a Loi Monory-type tax deduction, it seems unlikely that the government will give way now.
There may still be lessons to be learned from other countries. Belgium introduced a Loi Monory du Clerq in 1982, - to encourage individual share ownership, and to encourage Belgian companies to issue new share capital, and to use that money to invest in Belgian assets. Increases in capital in 1982 and 1983 could be categorised as 'AFV' capital, which gave not only a tax deduction for the individual buying the shares, but also reduced taxation on the dividends and a reduction in corporation tax that had to be passed on to the shareholders as an increased dividend.
Astrid Pieron from the Brussels office of the accountants Arthur Andersen says the scheme has been very successful, with most quoted Belgian companies listing AFV capital as well as normal shares on the stock exchange. The tax advantages were originally intended to last until 1992, but a reduction in the tax deduction in 1990 was matched by an extension in the duration of the scheme.
The Belgians added a new twist to the second Monory law. This gives a tax deduction to investors, but only for buying shares in the company that employs them.
In Britain, PEPs were brought into the employee share incentive system by allowing shares from such schemes to be transfered into PEPs. The creation of a share- owning democracy is well down the list of priorities for the 1990s. More important is the provision of new share finance for companies, and persuading companies to invest in new equipment when they do not have the profits to use the tax allowances generated by them.
An interesting approach was tried by the Canadian authorities in the mid-1980s, which came to an end mainly because it was too successful and cost too much in lost taxes. Individuals were allowed a deduction for the cost of buying shares, provided the company accepted a corresponding tax charge. The companies were allowed to offset their investment allowances against this charge.
With the abolition of Business Expansion Schemes from the end of 1993 there will no longer be any tax deduction for an individual taking an equity stake in a trading company; perhaps the Canadian model could become the fiscal incentive of the 1990s.
Mike Truman is author of 'Personal Investment Planning' and editor of 'Update', both published by Accountancy Books, a part of the business arm of the ICAW.
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