Widows in payout tax blunder


Hundreds of Scottish Widows members could face capital gains tax on their windfalls due to administrative bungling. Scottish Widows was taken over by Lloyds TSB last year, triggering payouts of between £500 and £100,000 to 1.6 million members with qualifying policies.


Members were given a choice of four options as to how their windfall would be paid to them. They had to tick one of the boxes on a form and return it to Scottish Widows by July 19.

But it has become clear that many members have not received the form of payment they requested. In particular, a significant number have been sent cheques instead of the loan notes they asked for. And if their windfall is more than this year's capital gains tax (CGT) allowance of £7,200 they will have to pay tax on the excess.

The loan notes are a form of IOU which pay interest and can be cashed in when required. This means that members can regulate their gain every year to stay within the annual CGT allowance.

Scottish Widows admits that of the 1.3 million windfalls sent out in response to completed option forms, which started going out on August 21, it has so far received 700 complaints from members who say they have not received the right form of payment. It also says that the electronic scanning process used to read all the returned forms from members specifying the type of payment cannot be 100% accurate.

Money Mail has been contacted by several Scottish Widows members, who say they ticked the correct box to receive loan notes, returned the form on time and yet still received a cheque.

There are other members who found it difficult to work out their likely windfall from the information provided by Scottish Widows. They vastly underestimated the sum they would receive, leading them to tick the box asking to be paid by cheque because they did not imagine they would breach the capital gains tax allowance.

Alan Young, of Scottish Widows, says: 'Where there is an error made by Scottish Widows we will take action to ensure there is no material loss to the member.'

However, just exactly how that will happen, and how quickly, is 'yet to be decided'. Mr Young says it will not mean writing a cheque to the Inland Revenue, but it will be some form of compensation.

In the meantime, members with grievances should put their case in writing to Scottish Widows - with a copy of the original form if possible - and wait for the matter to be decided.

Independent accountant Chantrey Vellacott also advises these members not to cash their cheques, as their legal position will be stronger, and to secure any copies of the original form if they were kept.

The Inland Revenue says that where Widows has made a genuine error, it will allow a swop into loan notes and CGT will not be levied, even if the cheque has been cashed. But this does not apply to someone who has just changed their mind.

For those who ticked the cheque box on the form and received a cheque for more than the annual CGT allowance, the tax must be paid. Basic-rate taxpayers will pay 20% of the amount exceeding the allowance and higher-rate taxpayers will pay 40%.

Which CGT rate you pay depends on your total gross income from all sources for the year. The shift from basic rate to higher rate occurs if you have an income of more than £32,785 in the year. Using an example of a windfall of £10,000, a member has a CGT liability on the £2,800 which exceeds the allowance.

If total income plus the £2,800 adds up to less than the £32,785 level, then only 20% is payable on the £2,800. If it exceeds the level, 40% is payable.

You may be able to offset some of the tax against any losses you have made in the year, such as internet companies which went wrong, but you will need to consult a professional accountant.

An unexpected and large capital gains tax (CGT) bill is facing keen photographer Peter Gordon, 55, now that he has received a windfall cheque from Scottish Widows. He is particularly annoyed by the charge because he specifically requested his windfall to be paid in loan notes, which he could cash in over several years, thus avoiding CGT.

Peter, a planning supervisor for a construction consultancy, says he ticked the correct box on the compensation selection form and sent it to Scottish Widows well before the July 19 deadline. The Widows helpline told Peter that it did not receive his form, so he was automatically sent a cheque, and that he should write in with his complaint. He has done just that and is waiting for an answer.

Widows in payout tax blunder

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