Carpetbaggers face tax bill

A muddle over PEPs could cost many of last year's windfall winners dear. By Teresa Hunter

THOUSANDS OF carpetbaggers, who made a killing from last year's building society share bonanzas may be forced to pay a huge chunk of their profits to the taxman because of a muddle over their personal equity plans.

Despite recent stockmarket setbacks, the former mutuals have continued to perform strongly, outclassing many other banking shares.

Most shareholders sought to shelter their holdings from income and capital gains tax by ticking the box on the share application forms and subscribing to the new mortgage banks' single company PEPs. They failed to realise that each investor can only have one single company PEP in any one year, and to apply for more than one is fraud.

PEP managers at most of the big investment houses have already detected large numbers of these fraudulent duplicate plans, but they fear the real scale of the problem is yet to be uncovered.

It will be any day now as the Inland Revenue is poised to begin its annual trawl through the PEP managers' returns. Peter Shipp of the PEP and ISA Managers Association (PIMA) says: "The PEP managers have already seen hugely increased numbers of problems with duplicate PEPs, and believe that what has come to light is just the tip of the iceberg. We will shortly find out just how serious the cock-up has been."

Investors who have fallen foul of the PEP rules may feel aggrieved that they could have sheltered their entire windfall portfolio from tax in a general PEP, which accepted the transferral of the free shares. Many general PEPs did not offer this flexibility, but where they did the shares did not count towards the normal pounds 6,000 PEP allowance.

Some investment managers blame the former building societies for producing literature which was primarily designed to encourage customers to opt into their own single company PEPs, rather than move to another fund manager.

Where customers have innocently opened more than one PEP, they may not even choose which one they wish to stick with. The rules state that the first PEP opened in the tax year is the qualifying one and all subsequent plans are null and void.

If a scheme is declared void, investors must return any tax credit and face a CGT bill on any profits taken above the pounds 6,000 annual exemption. Customers can expect short shrift from the Inland Revenue, which takes a hard line over fraudulent plans, not least because customers sign a declaration on every PEP application form confirming that they have not subscribed to any other single company PEP in the current tax year.

Furthermore, as there can be considerable administrative work involved in declaring a plan void, many PEP managers will charge a fee for the exercise - both Halifax and Woolwich levy a pounds 15 fee for doing so. Others may charge more.

The first and last of the flotations that summer, the Alliance & Leicester and Northern Rock, did not specifically offer a single company PEP to their customers, although a large number of PEP providers did offer schemes aimed at capturing these shares.

However, the Halifax, Norwich Union and Woolwich all did. On that basis, coming as it did towards the end of the timetable of sell-offs, Woolwich customers are likely to be among the most vulnerable.

The Halifax strongly denies this was the case, but admits that the entire process was always a bungle in the making.

Halifax assistant general manager Ian Black says: "We were very concerned at the time because of the way the timetable ran. All these share issues came one on top of the other in a matter of weeks. People were being drowned in paper."

Mr Black adds that he believes many people who had never paid capital gains tax before were in ignorant bliss of a bill winging its way towards them because of the profits they made from selling a bundle of windfall shares.

PIMA's Mr Shipp believes much of the confusion was caused because of the hype surrounding the shares' "nil value" status. "Even quite sophisticated investors thought demutualisation shares were somehow outside normal PEP qualifying rules. They were not."

It remains to be seen whether investors will look to the new banks for some form of compensation. That will probably depend on just how big a slice of the around pounds 18bn giveaway, the taxman will now try to claw back.