Q&A Dominic Coyle: Tax and Equitable Life compensation payments

Has the matter of liability to tax on payments at Equitable Life been settled?

Mr G.R., email

It has and we reported on it back in March when the Irish Revenue finally determined how the payments would be treated. The good news for most is that there will be no tax on the payment. Quite like the Standard Life situation, those shareholders who received their money as a lump sum will have it treated as capital and, following the Revenue's determination, free from tax.

Of course, the vast majority are still well out of pocket. The estimated losses of Equitable Life members following its collapse was around €6 billion: the payout of compensation is closer to a quarter of that, €1.5 billion, and is based to how much worse Equitable policyholders did than the would have if they were invested with another company. Essentially, the UK government determined that everyone would have lost on such policies anyway but that Equitable customers lost more that would otherwise have happened because of the way the company was run.

For the smaller number of policyholders in possession of with profit annuities – who will have compensation paid in instalments as part of their annual pension payment – the position is not so good. They will have their payment treated as income and subject to income tax (and possibly universal social charge and PRSI).

If your policy with Equitable was held through a pension scheme, the situation is also unequal. Members of defined benefit/final salary schemes – where the assets of the scheme are not the “property” of any named scheme member but of the overall pension fund – will face no tax bill. But members of the increasingly prevalent defined benefit schemes, which are held in individuals’ names, will be subject to tax on the payments.

The good news, if it can be seen as such, is that, 15 years ago, when Equitable went into meltdown, there were far fewer defined contribution pension scheme members as DB was at that time still the dominant pension model.

Still, ultimately, the 6,500 former Irish customers have spent 15 years waiting for compensation and are still well out of pocket.

Making sense of UK 'notional' tax credit Do you consider that Standard Life should try to facilitate people who returned by post their Standard Life Return of Value Forms which got delayed/misplaced in the mail in attempting to have the 10 per cent UK tax refunded to them.

After all the company supplied the forms and arranged their return (via Capita) and so must have some responsibility in the fiasco!

Mr C.O’R., email

With all the attention that the Standard Life return of value has received, most angles have been covered by now – if not necessarily resolved to the satisfaction of disgruntled shareholders. However, this is the first time that the 10 per cent “withholding tax” has been raised.

And it is confusing, not least because no tax is actually there to be refunded.

Many countries do operate a withholding tax system, where dividends are paid to shareholders net of a certain amount of tax. This tax can then be offset against individual tax liability.

However, in the UK, there is no withholding tax. What they have instead is a "notional" tax credit. This is set at 10 per cent which is the same as the dividend income tax rate for basic rate taxpayers in the UK. Dividends are paid gross to shareholders who are then liable themselves to sort out the tax due. But, in the case of those who pay tax at the basic rate – or those outside the tax net for whom the dividend income might be enough to see them become liable for tax – they can offset their 10 per cent tax liability against this "notional" credit.

If you are a higher rate taxpayer, you must still pay tax but you still get the benefit of the 10 per cent credit. Thus, if you are a UK tax resident paying dividend income tax in the 32.5 per cent bracket, your outstanding tax liability is 25 per cent, rising to 30.5 per cent for those in the highest 37.5 per cent band.

The whole system is an anomaly dating back to a time when the UK decided to abolish a withholding tax system which was in place up to 1999.

Anyway, what happens in Ireland is that the gross dividend received – in this case 73 pence sterling per Standard Life share – is taxed under normal income tax rules. There is no allowance for the benefit accruing to UK shareholders under the notional tax credit.

The position of Standard Life, and indeed the UK Revenue (Her Majesty’s Revenue Commissioners), is that there is no question of a refund as no tax has been paid by Standard Life on behalf of shareholders – including Irish investors – and no tax has been received by UK revenue in regard to those payments to Irish shareholders.

I have obviously made the point to them that, notional or otherwise, it means that Irish shareholders who have received their payment as a special dividend – ie income – rather than capital are being hit on the double in that they now have an income (and other) tax bill but do not even get the relief available to UK tax residents who opted for income, or received it by default.

Their answer, understandably, if not exactly encouraging is: “Yes, there is a different regime of taxing dividends in Ireland.”

This is not peculiar to Standard Life, or a special measure to address the return of value fiasco – which, in any case, does not appear to have impacted UK shareholders. It is simply a case of a tax “perk” available under the UK system which is not mirrored in Ireland – or pretty much anywhere else that I am aware of. Send your queries to Dominic Coyle, Q&A, The Irish Times, 24-28 Tara St, D2, or email dcoyle@irishtimes.com. This column is a reader service and is not intended to replace professional advice.