Irish Equitable Life policyholders who have been waiting 15 years for compensation may face a tax bill on the payout agreed by the UK government.

Revenue has finally ruled on the tax treatment of the compensation being paid to around 6,500 Irish former customers of life assurance business which was, up to 2000, considered the most blue-chip of private pension providers.

In a briefing note published at the weekend, Revenue says that those former policyholders who receive their money as a lump sum, will have that money treated as capital and will not face any tax bill on the amount.

However, a smaller number of people, who hold with profit annuities with Equitable, are receiving their compensation as part of their annual pension annuity payment and Revenue has ruled that this money will be treated as income. That means it will be subject to income tax and, where income is large enough, to universal social charge.

Revenue has also drawn a distinction for policyholders would have been with Equitable as part of a group defined benefit or defined contribution pension scheme . Members of defined benefit, or final salary schemes, will not see any adverse tax liability on compensation paid to their scheme. However, in the increasingly common defined contribution schemes, members will face an income tax charge.

The different treatment is explained because funds in a DB scheme are not attributable to any individual but to the scheme and its trustees. In DC schemes, the funds are managed by the trustee but are held in individual DC accounts for each member.

The possibility of paying tax on compensation is a further blow for Irish Equitable policyholders whose compensation is, in general, just a fraction of the amount they lost. British customers of Equitable received their payments free of income tax, capital gains tax and, if relevant, corporation tax.

Customers of the company were left out of pocket to the tune of almost €6 billion when it emerged that the company had been promising returns it could not deliver.

Following a 10-year campaign – led in Ireland by MEP Mairéad McGuinness, – and two parliamentary reports, the UK government finally accepted that policyholders had lost out in part because of failings in the regulatory regime. In 2010, it set up the Equitable Life Payment Scheme to pay compensation of £1.5 billion to cover the “relative loss” incurred by customers of the life company.

This “relative loss” was not the gap between what was in customers’ accounts and what had been promised but, as Revenue explains, the “difference between the actual returns received or expected to be received from Equitable Life and the assumed returns that the policyholder would have received if they had invested the same amount in a similar product in a comparable company”.