Many investors have over time built-up a significant
amount of money in personal equity plans (PEP).
Although contributions to PEPs ceased on 5 April
1999, by this time some £92 billion had been
invested before PEPs were replaced by ISAs.
Unlike a TESSA,
there are no qualifying periods for PEPs in order
to benefit from the tax advantages. However, as PEPs are equity based
investors should regard a PEP as a long term investment.
judicial separation or nullity of marriage it may not be desirable to encash
PEPs as the fund value will depend on the performance
of the underlying assets. Therefore where the
court order requires a portion of the PEP to be
transferred to the former spouse, the provider
could remove the PEP "wrapper" from
this portion of the investment.
This means that the PEP member can retain their
part of the investment unaffected and the former
spouse can transfer this portion with all capital
gains and income up to this point being free from
Individual Savings Accounts
Introduced from 6 April 1999 to replace PEPs,
individual savings accounts (ISA) were guaranteed
by the government to run for at least 10 years
offering investors a vehicle for tax efficient
long term savings.
ISAs have similar investment features of both
TESSAs and PEPs. The maximum allowance to a single
ISA manager is £7,000 per annum into a maxi
ISA where the investment must be applied to stocks
and shares including unit trusts and investment
trusts. Alternatively, the £7,000 per annum
allowance could be invested in a mini ISA with
£3,000 to cash, £1,000 to life assurance
and £3,000 to stocks and shares with the
option of having a different ISA manager for each
In addition, those with a maturing TESSA will be able to invest the original capital of
up to £9,000 into a TESSA-only ISA. This
capital cannot include any interest or bonuses
which can be invested in the individuals annual
For taxation, the £3,000 per annum cash
portion of a mini ISA will pay interest free of
income and capital gains tax for both basic rate
and higher rate taxpayers. The stocks and shares
portion of both a mini ISA and maxi ISA that pay
UK dividends will attract a tax credit of 10%
that is reclaimable by the ISA manager until 5
The treasury has established a set of voluntary
standards for ISAs in relation to charges, access
and terms (CAT). These CAT marked products can
apply to all elements including cash, stocks and
shares and insurance.
On divorce the cash element of a mini ISA will not be subject
to any tax penalties where the court order requires
this portion to be withdrawn and transferred to
the former spouse. As with PEPs, any equity element
of both a mini ISA and maxi ISA can be divided
without encashment by removing the ISA "wrapper"
from this portion of the investment.
The ISA member can retain their part of the investment
unaffected and the former spouse can transfer
their portion with all capital gains and income
up to this point being free from tax.