Byers in new sweetener on rail shares

Taxpayers face an extra £150 million bill on top of the £500m earmarked to buy off Railtrack shareholders.

The revelation will stun MPs already angered by Transport Secretary Stephen Byers' dramatic U-turn last month over using public funds to compensate Railtrack shareholders.

Senior Government sources say the Treasury decision is to ensure that the Government's 'early exit payment strategy' from Railtrack is sweet enough to avert potentially damaging legal action from Railtrack's small shareholders. It means shareholders will not have to pay tax on their shares, being offered at 250 pence each.

The extra £150m comes thanks to a Transport department and Treasury decision last week to waive tax on the £500m Government compensation package to shareholders. Such compensation, Treasury sources said, would normally be treated as a gift and subject to 30 per cent tax.

Government and Rail industry sources indicate discussions to head off a revolt among shareholders have focused on either an extra compensation hand-out from the Treasury of up to £150m - which would be repaid in tax - or giving Railtrack shareholders a tax-break, which would mean the public purse writing off the sum.

The Government's 250 pence offer to Railtrack shareholders includes £300m directly from the Government and £200m from Network Rail, the proposed 'not-for-dividend' successor to Railtrack. But this money will effectively be guaranteed by the Strategic Rail Authority - funded by the Department of Transport Local Government and the Regions. The compensation package totals £1.3 billion, including the £375m sale of the Channel Tunnel Rail Link, £350m in cash reserves and property assets.

The SRA will act as guarantor of last resort to a £9bn bridging loan to finance Network Rail's plans and get Railtrack out of administration quickly, before longer term financing is put in place. UBS Warburg, Network Rail's adviser, West LB, Barclays Capital and Royal Bank of Scotland will this week be invited to bid to be part of the syndicate to extend the loan.

The offer may avert plans by the Railtrack Shareholders Action Group to join Railtrack Private Shareholder Action Group, which has told lawyers to launch a writ against the Government.