Tough lessons in investments

Personal Finance Editor

WHAT IS the Inland Revenue up to? (Apart from collecting taxes, of course.) News emerged this week that a tax wheeze used by parents and grandparents to help pay school fees is to be clamped down on. And this under a Conservative government. Strange, too, that the story should appear the week of the two main teaching unions' annual conferences.

The Revenue's move followed a decision by the Charity Commission to withdraw charitable status from severaleducational trusts. By investing money through these trusts, families have been able to get tax-free returns. Without the charitable status, the profits become taxable, leaving less money to pay fees. As a result, at least 15,000 families face an increase in the cost of putting children through private education.

The Charity Commission said it had decided to withdraw the tax-favourable status from these trusts - which include those associated with the School Fees Insurance Agency (a specialist financial adviser) and insurer Sun Life - because they gave insufficient public benefit to justify the perks. The Revenue said the change in status will come into effect next April.

A separate lesson is that school fees plans bought via educational trusts, even with tax-free returns, are not that much cop. If you already have them, by all means hang on until things are clearer as there are expected to be appeals and further discussions before the tax bills are totted up or start to arrive. But for people looking at these plans now, and with five years or more before they have to start shelling out fees, a PEP might be a better bet. It should produce higher (and definitely tax-free) returns from investing directly in the stock market, albeit with higher risk. Typically with educational trust plans, your returns are fixed at the outset and are relatively low. And with a PEP, you are not obliged to spend the returns on school fees.

An alternative that is closer in risk terms to an educational trust plan, is zero dividend preference shares. However, most people would need advice with these, or to go back to investment school. No wonder the vast majority of people simply pay for their kids' education out of income as they go along.

THE financial world may seem boring, but this is no reason to throw money at faddish investments. A case in point is an ostrich breeding operation, "guaranteeing" returns of 50 per cent a year, that the Serious Fraud Office is investigating and the Department of Trade and Industry is looking to close down.

Thousands of investors paid up to tens of thousands of pounds to the Ostrich Farming Corporation for ostrich hens, based on a promise that the company would buy back chicks at pounds 400 or more each. The extent of investors' losses is not yet clear. But the warning signs they might have heeded are. One is that if this was such a good investment - try beating a guaranteed 50 per cent a year - why were the public being let in on it? Theoretically investors could have borrowed up to the hilt, put the money into the ostriches, then paid off the debt and still made a packet.

The key here is that an investment guarantee is only as strong as the backer of that guarantee. The promised returns offered by OFC appear to have depended on soaring demand for ostrich meat. Well, maybe - there's no talk of ostriches being mad, after all.

More worrying, perhaps, is that OFC was allowed to get away with advertising such investment potential because of a regulatory loophole (a point Your Money warned about on 11 February). Ostriches, because they are a commodity such as diamonds or even angora rabbits (as featured in a scheme some years ago), are not covered by the strict regulation of advertising and promotion that applies to share-based and other investments. And investors are not covered by a compensation scheme.

An action group has been set up by Stephen Whitmore at Salisbury-based solicitors Wilsons. Ring 01722-412412.