In the United Kingdom a Personal Equity Plan is a form of tax-privileged investment account. They were introduced by Nigel Lawson in the 1987 budget for Margaret Thatcher's Conservative government to encourage equity ownership for in the wider population. PEPs were allowed to contain collective investments such as unit trusts. In 1992 a new type of PEP called a single company PEP was introduced only allowed to hold single company shares. To distinguish between the two types the original variety were called general PEPs.

Tax Privileges

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• Growth is free from capital gains tax within the fund and on encashment.
• Income is free from income tax.

Limited Contributions and Suitable Assets

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There were two types of PEP:

• A general PEP with an annual allowance of £6,000.
• A single company PEP with an annual allowance of £3,000.

Investments in a general PEP were limited to qualifying collective investments. Qualification was previously defined as an investment that invested at least half of its assets in the UK and was later extended to the European Union. The qualification rule for existing PEPs was removed in 2001. Single company PEPs could be invested in shares in a single company. Additionally Windfall shares received by members from mutual bodies when they became listed companies could also register the holdings as a PEP.

Erosion of Tax Privileges

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From April 6th 1999, the Advanced Corporation Tax relief on share dividends received on a PEP was halved, partially ending their tax exempt status. From April 6th 2004 all relief on dividends was removed, although no additional tax on a higher rate is due where otherwise it might be. Gains on capital and all other forms of income such as cash interest and bond income remained tax free. Significant cash holdings for any length of time are discouraged by the Inland Revenue and the holdings in a PEP should be largely based on shares or corporate bonds.

PEPs Replacement

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Following the introduction of Individual Savings Accounts on 6th April 1999 by the new Labour government, no new contributions could be made into PEPs. Existing funds retain their tax privileges and can be transferred to alternative managers. Furthermore the distinction between general and single company PEPs has been removed allowing more freedom of movement.

Financial services | Investment