Do you have to pay tax on a lottery win?

HM Revenue & Customs doesn’t regard lottery winnings as income, so all prizes are tax-free – hurray! However, there could be tax implications once you’ve banked your winnings.

The cash will form part of your estate and be liable for 40% inheritance tax (IHT) if it takes the value of your estate above the current threshold of £325,000.

Gifting millions will not save you from paying IHT either: HMRC will tax you on a sliding IHT scale should you die within seven years of gifting any cash to friends and relatives – a 20% reduction in tax if you die between three and four years after gifting, a 40% reduction between four and five years, etc). You can get around this by making sure the recipient signs an agreement that they will pay any IHT due if you do die within seven years.

This can cause problems for lottery syndicates who could be caught out if the person who receives the cheque dies within seven years of the win. However, they can protect themselves against IHT liabilities by drafting a simple agreement. As this HMRC document states: “No liability to inheritance tax arises on winnings by a football pool, National Lottery or similar syndicate provided that the winnings are paid out in accordance with the terms of an agreement drawn up before the win.”

You can download a syndicate agreement template from the National Lottery website.

Mark King

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