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   PEPs and ISAs
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Personal Equity Plans
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.

On divorce, 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 tax.

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 segment.

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 ISA allowance.

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 April 2004.

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.

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