Thousands hit by Isa shake-up

TENS of thousands of ordinary investors with Isa and Pep savings schemes could see their valuable tax breaks wiped out because of a controversial rule change by the accident-prone Inland Revenue.

Savers risk losing tens of millions of pounds in tax concessions and a popular form of investing - 'fund of funds' schemes - could be wiped out.

The Revenue's move has sparked fury in the City, where big players such as Threadneedle, Gartmore, Schroders and Axa are considering selling some funds to protect savers.

A crisis meeting will be held this week between the Revenue, the Investment Management Association - the trade body representing fund managers - and the Financial Services Authority.

The problem has arisen because of the Revenue's interpretation of complex new fund industry rules from the European Union.

The affected investments are the popular funds of funds -pooled investments in other funds, allowing one manager to capitalise on the expertise of another.

Most big investment houses offer at least one fund of funds vehicle and many market them aggressively, attracting billions of pounds of investors' money.

The problem, in the Revenue's eyes, arises when portfolios have a mix of pre-2002 and post-2002 funds.

Unit trusts set up before February 2002 are governed by different rules to those launched since and it is the mix that could make the fund of funds ineligible for Isa or Pep tax breaks after February 13 next year.

Fund managers say that unless the Revenue backs down, they will have to sell holdings that could be top-performing investments.

Jim Irving, senior adviser at the IMA, said: 'To say we are worried is an understatement. Institutions are already withdrawing money from funds to ensure compliance.'

David Middleton, head of commercial development at Gartmore, said: 'We are hoping the Revenue will make allowances and that the problem can be averted.'

Mark Dampier of broker Hargreaves Lansdown, one of the biggest sellers of Isas and Peps, said: 'The implications are huge. Our own fund of funds, with thousands of investors, could be forced to sell holdings such as Neil Woodford'shighly rated Invesco fund, and that would be a disaster. We would be selling for bureaucratic reasons rather than investment reasons.'

Privately, fund managers are astonished. 'This is a stupid, obsessive devotion to rules,' said one. The Revenue would not comment ahead of this week's meeting.