Widows' payout pleases taxman

Scottish Widows policyholders will not be the only ones celebrating this week when higher windfall cheques than expected finally arrive.

Scottish Widows policyholders will not be the only ones celebrating this week when higher windfall cheques than expected finally arrive.

Hector, the bowler-hatted taxman, will be cracking open the champagne, as the Government stands to make hundreds of millions of pounds from capital gains tax (CGT).

The windfalls are part of the Edinburgh insurer's £5.8bn takeover by Lloyds TSB. More than 100,000 policyholders will get cheques of more than £10,000, pushing them above the CGT allowance of £7,200.

Nearly a million policyholders will get an average of £5,700, depending on the size of their policies. So many of these will also be pushed over the CGT threshold, particularly if they have made gains this tax year from other investments. A basic windfall of £500 will be paid to a further 650,000 customers.

"The vast majority of windfall pay-outs for building societies in the past tended to be well below the CGT threshold," says John Whiting, tax partner at PriceWaterhouseCoopers. "But this time Hector will also be thinking: 'Oh goody'."

Basic rate taxpayers fork out CGT at 20 per cent, but higher rate taxpayers pay 40 per cent - a hefty chunk of any gain. Those getting £10,000 could face bills of £4,000 if other gains have used up their CGT allowance.

A "significant minority" of policyholders receiving windfalls opted for loan notes instead of a cheque. Loan notes let them cash up to their CGT allowance each year to avoid tax.

Sadly, loan notes had to be requested by 6 July - before policyholders knew how much their windfall was worth. "We have been able to increase windfall payments on average by 8 per cent due to the increase in value of the company," said a Scottish Widows spokeswoman.

Tax experts are concerned many of those receiving pay-outs are people who do not normally fill in tax returns. Unless they declare their liability by 5 October 2001, they will face a fine.