Revenue rules PEP funds out of bounds

INVESTORS in personal equity plans that put part of their money in some Far Eastern and other emerging markets could find a tax bill thudding through their letterboxes.

The potential tax headache for investors follows a decision by the Inland Revenue to query the tax-exempt status of some foreign countries.

Tax officials say countries such as Mexico, Thailand, South Korea and Malaysia are not on its list of approved markets for PEP purposes. This means that money invested in those countries through a PEP is not exempt from tax.

Only funds invested in the tax year to April 1994 are involved, following the Revenue's decision to tighten up the rules. Up to 20 funds are thought to be affected. Under PEP rules, at least 50 per cent of a pounds 6,000 annual investment must be in UK or European stocks.

Up to pounds 1,500 may be invested in funds elsewhere, but at least half of that must be in shares from stock exchanges listed by the Inland Revenue. This includes Colombo, Sri Lanka; and Athens, Greece, but not South Korea or Mexico.

The confusion stems from the fact that until recently some fund managers believed the relevant list of stock exchanges was a different one, issued by their own watchdog, the Securities and Investments Board.

Talks to resolve the difficulty have taken place between the Inland Revenue and officers from the Association of Investment Trust Companies, representing the PEP industry.

Nick Wells, a product development manager at Barings, said: 'We hope it will be possible to solve the problem. I understand that it was a simple misunderstanding and there is no reason why those stock exchanges should not be listed. We have a very small number whose PEPs are part-invested in our Korea fund.' He added that it was possible that if the decision went against investors, many fund managers would be likely to refund any tax losses.

A unit trust that invests in emerging markets across the world by putting money into existing investment trusts has been launched.

This fund of funds is the first launch by Portfolio Fund Managers. Tim Miller, the chairman, said: 'It is probably more risky to have nothing in emerging markets than to have up to 20 per cent of a portfolio in them.'

Richard Timberlake, the investment director, said the volatility of the stock markets could be modified by holding funds invested in many countries. The markets do not tend to move in line with each other.

The initial charge is 5 per cent for investments under pounds 5,000, but reduces in steps to zero when they exceed pounds 100,000. The annual charge is 1.2 per cent.