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 Personal Equity Plans or PEPs

Personal Equity Plans or PEPs were investment vehicles offered by the government of the United Kingdom in the 1980s and 1990s to encourage increased investment in British corporations by the general public. First proposed by then-Chancellor Nigel Lawson and championed by Margaret Thatcher's conservative government, PEPs were introduced as a new form of investment account through the British Finance Act of 1986, which authorised individuals to open PEPs and begin purchasing qualifying assets at the start of the 1987 tax year. PEPs offered highly attractive tax advantages, exempting investors from paying either capital gains tax on the proceeds they realised from the sale of PEP-held securities or income tax on interest and dividends they derived from their cash or stock holdings. In addition, an investor was allowed to remove funds from a PEP at anytime and for any reason without losing the benefit of the tax exemptions.

Initially, the range of investments that could be held in a PEP were quite limited. At least 75% of the value held in a PEP had to be invested in equities, and an individual investor could use a PEP only to purchase shares of United Kingdom-based funds or United Kingdom corporations. A fund or company qualified as UK-based if at least half its assets were invested in the UK. Eventually, however, the restrictions on PEP holdings were loosened. Investors were permitted to invest in qualifying collective such as unit trust investments, and to purchase corporate bonds and preference shares. The requirement that the majority of a PEP's holdings be UK-based was also relaxed so that investors could also buy European Union equities In addition, up to 1500 pounds worth of currency held in a PEP could be invested in non-qualifying funds or shares without compromising the account's privileged tax status. The qualification rule was eliminated entirely in 2001.

In 1992, the British government introduced a new type of PEP known as a Single-Company PEP, through which an investor could hold shares in a single company. Investors were allowed to contribute up to 6000 pounds per year to a traditional PEP, now known as a General PEP, and up to 3000 pounds per year to a Single-Company PEP.

PEPs succeeded perhaps too well in their mission to encourage investment among the general population of the United Kingdom, and it soon became obvious to Inland Revenue that it was missing out on a significant source of tax revenue. PEPS and their attendant tax benefits were slowly phased out as an investment option beginning in April 1999, when the new Labour government introduced ISAs, investment accounts that were decidedly less advantageous tax-wise than PEPs. Although those who had investments in PEPs were allowed to keep them there subject to the generous tax rules that had previously governed the administration of these accounts, no new PEPs could be opened, and no new money could be invested in already-existing PEPs. The distinction between General and Single-Company PEPs was eliminated.

In addition, as of April 6, 2004, Advanced Corporation Tax relief on dividends received on stocks held in PEPs was cut in half. PEP-related tax-relief on dividends was terminated altogether in April 2004. Finally, in April 2008, PEPs were finally terminated. All PEPs still existing as of that date were converted into Stocks and Shares ISAs, which imposed a lower annual contribution limit on investors and offered tax savings that, while significant, were nowhere near as generous as those enjoyed by PEP holders. While income received from ISA savings and investments remains largely non-taxable, a hefty penalty is imposed on cash holdings in ISAs in an effort by Inland Revenue to discourage investors from sitting on their capital rather than re-investing it in the market.

The manager of an ISA is now required to deduct a flat fee from the account, equal to 20% of the account's univnested cash holdings and deliver it directly to HM Revenue & Customs. As of April 2008, financial managers were authorized to extract this fee from the univested cash holdings in former PEPs that had been converted into Stocks & Shares ISAs.

PEPs - probably the largest information source about PEPs in the UK!

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