Guide to ISAs, PEPs and TESSAs

PEPs (Personal Equity Plans)

A PEP is a way of investing in certain kinds of shares and securities tax-free.

PEPs have been replaced by stocks and shares ISAs from 6 April 1 999 and no new subscriptions to PEPs could be made after that date. Existing PEPs at that date can remain in existence. The information that follows is for those investors who have existing PEPs.

The rules for PEPs changed from 6 April 2001 to bring them more in line with the rules for stocks and shares ISAs.

What are the tax benefits?

These are the same as for stocks and shares ISAs.

• You pay no tax on any of the income from your PEP investments.
  
• You pay no tax on capital gains arising on your PEP investments (but note that this means that losses on PEP investments cannot be allowed for Capital Gains Tax purposes against capital gains outside your PEP).
  
• Your PEP plan manager will arrange for tax credits attached to dividends from UK companies (which from April 1999 have had a value of 10 per cent) to be paid into your PEP until 5 April 2004. Dividends from companies based outside the UK do not carry a tax credit
  
• You can take your money out at any time without losing tax relief.
  
• You do not have to declare income and capital gains from PEP investments, or tell your Tax Office that you have a PEP.

How does a PEP work?

All PEPs are managed by a plan manager under terms agreed with you in writing. You can no longer pay money into a PEP, but the plan manager continues to manage the investments made from funds you subscribed before 6 April 1999.

All PEP plan managers must be approved by the Inland Revenue and authorised by the Financial Services Authority, but neither they nor any other Government Department have approved any PEPs. They do not guarantee that any PEP plan manager is able to manage any PEP satisfactorily, or that any PEP investment will produce the expected return.

Changes from 6 April 2001

• The difference between single company PEPs and general PEPs has been removed. This means that all PEPs are now subject to the same rules.
  
• The investments which can be held in a PEP now follow the rules for stocks and shares ISAs (see page 16). This means that PEPs can now invest in the listed shares of companies based anywhere in the world.
  
• Subject to the plan manager's terms and conditions you can now transfer part of a PEP to a different manager, not just a whole PEP as before. The rules are the same as for transfers of ISAs (see page 7).

What has not changed?

• Any investments held at April 2001 which would have been eligible under the former PEP rules, but are not eligible under the ISA rules, can continue to be held in a PEP. However, you cannot add to any existing PEP investment unless it qualifies under the new rules.
  
• The treatment of interest paid on cash held awaiting investment has not changed - see below.

When can I take money out of my PEP?

You can receive income from the investments held in a PEP, take money out of, or close the PEP at any time without losing any tax relief you have already built up. However, once you have taken money out, you cannot put it back in.

Can I hold cash in a PEP?

Yes, but only for the purpose of purchasing investments.

What about interest on cash held in a PEP?

Interest on cash held in a PEP whilst awaiting purchase of investments will be credited without deducting tax.

If you withdraw interest paid on cash (not investments) held in your PEP, this interest is not taxable unless you withdraw more than £180 in a tax year. If you withdraw more than £180 then all such interest withdrawn in the tax year is subject to tax. The plan manager will deduct tax at 20%. Higher rate taxpayers will have to pay further tax on this interest. You must declare this interest on your Tax Return or if you do not get a Tax Return and you are liable to tax at the higher rate you must tell your Tax Office. If you are not liable to tax on the whole of this interest, you will be able to claim back some or all of the tax deducted.

Can I get reports and accounts of the companies in my PEP?

Yes, Your PEP plan manager can arrange for you to receive reports and accounts, although there may be a charge. You may also be able to attend and vote at the annual meeting of companies in which your PEP invests.

What happens if I go abroad?

You do not have to close your PEP and the income and gains will continue to be exempt from UK tax.

What happens if I die?

The PEP will end on the date of your death. There will be no tax to pay on income or capital gains up to that date, but your personal representatives will have to account for tax on any income or gains arising after your death. The plan manager will either sell the investments and pay the proceeds to your personal representatives (or a beneficiary of your estate) or transfer the investments directly into their hands, as specified by the terms and conditions of the PEP.

PEP investments form part of your estate for Inheritance Tax purposes.