YOUR MONEY: Rocking the house boat

Personal Finance

FOR a government that believes in not getting involved with markets, the present administration is not doing too well. According to the mortgage lenders, the Chancellor's plan to reduce the availability of mortgage interest support for borrowers who lose their income after October will send the housing market to hell in a handcart - by making it almost inevitable that anyone with a new mortgage taken out after October also loses his or her home if they stop working for a few months.

The resultant rise in repossessions will force down house prices, drive more people into the negative equity trap and make everyone else, including first-time buyers, even more reluctant to buy a home. Sooner or later, house-builders will be caught in a trap between falling house prices and rising building costs, with only the availability of cheap credit or cheap land as a means of escape. Even those are unreliable.

Meanwhile, in an attempt to make it easier and cheaper for companies to attract more private investment, the Government has allowed investors to buy funds investing in fixed-interest bonds issued by industrial and commercial companies in the UK and EC and hold them as personal equity plans, free of income and capital gains taxes.

They are being promoted by fund managers as high-income and relatively risk-free. In PEP form, they do seem quite attractive, provided interest rates continue to fluctuate at or below current levels rather than above. If investors do not have to sell at times when interest rates are high (and bond values are depressed), there is probably less risk of loss than from holding shares in companies.

But if they are anything near as successful as their promoters hope, they will attract more than pounds 6bn of private investment over the next 18 months. If, as seems likely, investors cannot find much in the way of new savings out of current income, much of the money going into corporate- bond PEPS will come out of Tessas, the tax-exempt, risk-free savings schemes created by John Major as Chancellor five years ago.

Tax-exempt and risk-free they certainly are, but the interest they earn, even tax-free, is much less attractive than it was in 1991. And when, next year, investors are free for the first time to withdraw the money from essas without losing the tax advantages, a rush of money out of Tessas, which are generally deposited with banks and building societies, into corporate bond PEPS run by fund managers seems likely.

The effect of such large flows of funds is unlikely to be increased stability.

Privatisation has created a pounds 50bn market in private monopolies, which needs constant intervention by the regulators and can cause pounds 1bn surges in market values when new rules appear.

Meanwhile, the Inland Revenue - at the behest of the Chancellor in his relentless search for new sources of tax revenue that would allow him to reduce the headline rate of income tax - intends to tax capital gains on fixed-interest securities as income.

The distinction between them has always been somewhat artificial, because most fixed-interest stocks issued by the Government are guaranteed to be redeemed at par after a set period of time. Governments have taken advantage of this to issue some stocks earning lower interest rates, which investors happily buy at a modest discount in the knowledge that it will give them a guaranteed capital gain on maturity.

Under protest, the Treasury has now agreed not to impose income tax on capital gains on stocks already held by investors or on gains that might accrue in corporate-bond PEPS. But new issues will have gains taxed as income, and who knows where next the non-intervening authorities will turn up to create fresh instability?