Extending PEPs

Is the change in rules governing corporate bond investment in PEPs liberal enough?

Changes in Inland Revenue rules allowing the use of corporate bond investment in PEPs came into force last week (6 July), amid concerns by law firms that the shift in rules may not prove liberal enough.

Tony Gammon is investment manager at Thesis, the investment management arm of West Sussex solicitors firm Thomas Eggar Verrall Bowles. He says the chance to invest through tax-free PEPs in the high-yield, low-risk instruments should be particularly attractive to the client base of many solicitors.

"These PEPs should prove attractive to solicitors, who are often dealing with clients who want to maximise income rather than capital growth," he says.

THESIS has already developed its own High Income General PEP which it hopes can take advantage of the rule changes. According to Gammon, other major unit trust groups are likely to market aggressively their own corporate bond PEPs now the new rules have come into effect.

While the extension of allowable PEP investments to domestic corporate bonds, convertibles and preference shares is clear, there is concern over whether rule changes by the Inland Revenue will cover other grey areas in the run-up to the deadline.

Gammon says: "It is doubtful whether the rules will allow for Eurobonds, and these are the ones we really wanted included. Without these, there is a danger that too many of the available options will be low-quality domestic and third-line shares. Without Eurobonds, corporate bond PEPs may struggle."

But it appears that the Government is not keen to extend the PEP tax advantage to fixed-interest securities involving little risk. Nor is it to allow corporate bond PEPs to invest in bonds issued by banks or other credit institutions in an apparent attempt to prevent corporate bond PEPs competing too closely with retail deposits in orthodox savings accounts.

In a statement last month, Financial Secretary to the Treasury, Sir George Young MP, made it clear that it was intended that manufacturing companies should benefit from the changes in the rules.

He said: "The new rules will herald a new chapter in the history of PEPs. They will extend the choice of tax-free investments for savers, and will help companies to cut the cost of raising business capital."