Widows windfalls face tax up to pounds 16,000

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The Independent Online
TENS OF thousands of Scottish Widows' with-profits policyholders face tax bills of up to pounds 16,000 when they receive windfalls from the pounds 7bn takeover of the mutual life insurer by Lloyds-TSB next year.

It is estimated that the tax take for the Government from the takeover could be as high as pounds 500m, depending on how the payouts are distributed.

The Inland Revenue has ruled that the windfall payments will be treated as capital gains, meaning that higher rate tax payers are liable to be taxed at the full 40 per cent rate.

The majority of Scottish Widows' 900,000 with-profits holders will receive payouts of several thousands pounds at most.

But some long-standing policyholders, many of whom will be pensioners or close to retirement, are entitled to much larger payouts of up to pounds 40,000.

They will have to hand a sizeable chunk of those gains to the taxman. Base rate payers will pay tax at the lower 20 per cent rate.

Scottish Widows, which is writing to its policyholders today to clarify some of the issues arising from last month's decision to lose its mutual status, is aware of the tax problem.

However, the group said yesterday that there were no plans to offer a non-cash alternative, which would enable those expecting big payouts to avoid a large tax liability.

This is the first demutualisation where tax is likely to be an issue. Although in the cases of both Norwich Union and Scottish Amicable the Revenue also ruled that the windfalls would be treated as capital gains, in practice there were only a handful of cases in which the sums paid out were big enough to breach the exemption threshold, which in the current year stands at pounds 7,100.

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

The maximum 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.

Many of Scottish Widows policyholders will be higher rate tax-payers and in some cases may also have further gains on shares and other investments that will add to their capital gains tax liability.

When the Lloyds-TSB deal was announced last month, Scottish Widows said that with-profits policy holders could expect payouts averaging pounds 6,000, but with the levels of payouts skewed towards those who had been contributing to policies for long periods of time.

The precise structure of the payouts will not be known for several weeks. Members who are not with-profits holders will receive a lump sum of pounds 500 each.