Scottish Widows appeals windfall decision

SCOTTISH WIDOWS is appealing to the Inland Revenue in an attempt to overturn a ruling that threatens to land thousands of its members with an unwanted tax bill on their windfalls from the pounds 7bn takeover of the mutual life insurer by Lloyds-TSB.

Scottish Widows' 900,000 with-profits policyholders have been told to expect an average pounds 6,000 windfall, although that could extend to pounds 40,000 for those who have been members for many years. However, the ruling means that high rate taxpayers will not see pounds 2,000 of those payouts, which will go instead direct to the taxman. Even basic rate taxpayers will lose on average pounds 1,200.

The threat comes in the wake of the recent decision by the Inland Revenue to treat the pounds 250 AA windfall payments as dividend income for tax purposes.

Previously it had been thought that some Widows members could face a bill for capital gains tax, but only those whose windfalls were big enough to breach the pounds 7,100 threshold for CGT exemption.

The delay while this issue is resolved may put paid to hopes of being able to flesh out details of the windfall payments within the next few weeks. Tax experts warn that unless the Revenue backs down, Widows could be faced with the prospect of a lengthy court battle or serious unrest from its policyholders.

Widows said yesterday: "Discussions with the Inland Revenue are ongoing. Beyond that there is nothing more than we can say."

Some estimates suggest that the Revenue's share of the payouts could total pounds 500m, depending on how Widows structures the distribution of the pounds 5.7bn which is to be shared out between its members. Members who are not with-profits holders will receive pounds 500 each.

This is the first demutualisation where tax has threatened to be a serious issue.

The only precedent is Scottish Amicable which paid out only pounds 250 upfront when it was taken over by Prudential, the insurance giant. Further sums were paid out to policyholders in the form of top-ups to policies, which were tax free.

In the case of Norwich Union and the Halifax, where individuals received windfalls on a similar scale to those envisaged for Widows policyholders, the issue did not arise because the windfall came in the form of shares, not cash. The maximum cash payout when the Birmingham Midshires Building Society was taken over by Halifax was pounds 5,400. In other demutualisations where members received windfall shares, they were able to shield themselves from the taxman by putting those shares into a single company Personal Equity Plan. That loophole was closed earlier this year when Peps were scrapped.

Building society stock market floats are exempt from tax by the provisions of the 1986 Finance Act.

The Inland Revenue refused to comment as a matter of policy.