LONDON - Fears are growing in the unit trust industry that it is on the verge of losing billions of pounds worth of business because the UK's new core tax shelter for private investors, the Individual Savings Account or Isa, is so complicated. Unit trusts are the British version of mutual funds.

A simple slip-up by investors will reduce the amount they can invest in unit trusts by GBP3,000 annually (about U.S. $4,900). One of the UK's largest unit trust groups, M&G, has warned that investors could potentially lock themselves out of GBP36 billion (U.S. $58.3 billion) of tax free stock market investments in the tax year 1999-00.

The concerns arise from the fact that investors in the UK have grown accustomed to the simplicity of the Isa's predecessor, the Personal Equity Plan (Pep). The structure and rules for Isa's, that took effect April 6, are far more complex and unit trust groups expect that investors will find it difficult not to be confused by the rules.

Investors pay no capital gains tax and a reduced rate of income tax on cash and equity investments which are wrapped in Isa's. Every taxpayer can shelter up to GBP7,000 (U.S. $11,300) in his Isa this tax year. Taxpayers could only shelter equity investments in Peps.

The problem with the new shelter is that it comes in two formats: mini and maxi. This structure was devised so that investors could shelter both cash and stock market investments and use different financial services providers for each. Taxpayers can have either up to three mini Isa's or a maxi Isa - but not both in the same tax year. Investors who choose to invest only in stocks, bonds and pooled funds such as unit trusts can use up their whole allowance of GBP7,000 on those investments in a maxi Isa from a single provider.

Maxi Isa's can hold cash and equities but if there is a cash component, the most that can be invested in equities falls to GBP4,000 (U.S. $6,400).

And if a mini cash Isa is opened with another provider, the investor again automatically loses the right to invest his full Isa allowance in equity-based investments. Only if a maxi Isa is opened at the outset and reserved for equities can an investor use his full GBP7,000 to invest in stocks and bonds.

Unit trust providers are now calling for radical changes to be made in Isa's. The Association of Unit Trusts and Investment Funds (Autif), the industry trade group, has said making the new investment product much simpler is at the top of its agenda.

"Isa's have to be [made] simple," said Alan Ainsworth, Autif's chairman and the deputy chairman of Threadneedle, the fund management group, of London. "The sooner we can do that the better."

Marketing directors are warning that unit trust advertising budgets will have to increase dramatically in the coming months to alert investors to the fact that once they invest a cash sum in an Isa, their equity investment will be cut. Many investors mistakenly believe that they can use an Isa to shelter cash for part of the tax year and then switch into stocks and unit trusts later.

"Last year, 60 per cent of M&G Pep investors used their full tax free allowance," said Tessa Murray, a spokesperson for M&G.

"Anyone planning to do the same this year needs to head straight for a maxi Isa if they want to invest as much as possible in stocks and shares within a tax free environment."

High street banks, the major retail banks, offering attractive rates of interest on cash Isas have gotten a head start on the unit trust providers who have been preoccupied trying to sell as many Peps as possible by the end of the tax year, April 5.

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