Personal Equity Plans (PEPs)

Due to be withdrawn for new investment from April 6th 1999, the Personal Equity Plan is one of the most popular forms of tax free savings and has become more so, each year since its introduction by Nigel Lawson when Chancellor of the Exchequer in 1987.

There are two types of PEPs - General and Single company.

The General PEP is what most people are talking about when they mention a PEP.

In most cases, it is a Unit Trust which has special tax status.

By keeping to the rules governing them, these investments are free of any income tax on dividends / interest paid out, and free of capital gains tax if a profit is made when sold.

The main rules are:

• A certain proportion of the money must be invested in stocks & shares in the UK/EC; it cannot all be in US or Japanese companies for example.
• Only 1 PEP can be taken in any one tax year
• There is a maximum of £6,000 that can be invested in any one tax year
• You cannot split the investment into a number of PEPs with different institutions
• You must be resident in the UK (and ordinarily resident in the UK for tax purposes) at the time the money is invested
• You must be over 18 and cannot hold the PEP on behalf of a child
• The PEP can only be held in someone's sole name.

Some PEPs follow the general stockmarket up and down. These are called "tracker" funds. Others may specialise in certain types of companies - for example technology firms, or those in potentially high risk/high return situations such as developing countries/ SE Asia etc. Others still will concentrate on trying to pick out the best combinations from say UK companies with the objective of achieving better returns than the tracker funds. A few years ago, Corporate Bond PEPs became available. These do not invest in company shares, but in special types of loans issued by big firms in the same way as the government issues Gilts. They tend to offer a good rate of income rather than capital growth.

A Single company PEP can be taken in addition to a General PEP. The annual limit is £3,000 and this money must be used to purchase shares in just one firm. This is a higher risk strategy than a general PEP but is often used when people receive shares from their employer or as part of a windfall. To qualify for inclusion in a single company PEP, the appropriate declaration and paperwork needs to be completed within 42 days of the purchase (or receipt) of the shares.

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