You don’t pay any tax on lottery winnings in the UK, whether it's the normal lottery, scratch cards or even Euromillions.
Legally classed as gambling, any profits (a win) you make from buying a lottery a ticket are exempt from tax, so the full amount you win is the amount paid to you. So, If you win £1 million on the lottery, £1 million pounds is what lands in your bank account. That means no capital gains tax, income tax or national insurance on lottery winnings.
Interest earned on lottery winnings once it's been paid into your bank account could be subject to income tax.
On death, your lottery winnings could also be subject to tax. Any unspent lottery winnings will form part of your overall estate of money and assets. And whoever inherits your estate might have to pay inheritance tax on some of it.
Gifting lottery winnings to family and friends
When it comes to giving lottery winnings to your family and friends, the rules applied are pretty much the same as any type of money gift. And the main tax implication surrounding money gifts is inheritance tax.
£3000 annual gift allowance
Every tax year (6 April to 5 April), UK citizens can ‘gift’ £3000 without inheritance tax implications. This includes birthday presents or Christmas gifts. So if you gifted somebody a car for Christmas, anything over £3,000 might be subject to inheritance tax at a later stage.
If you don’t use your allowance one year, you can carry it over by 1 year.
So potentially, you can gift up to £6000 in a tax year.
On top of the £3000 annual allowance, you can also make smaller gifts up to £250 to as many people as you like. But make sure you’ve not used your £3000 allowance on the same person. So if you've already given £3,000 to your daughter, you can't give another £250 to her in the same tax year.
You give £3000 to your daughter in tax year 2021/22.
You also give 5 gifts of £250 to your 5 nieces and nephews in the same tax year.
NOTE: You shouldn’t go over the £250 limit as the entire amount will then be liable to possible inheritance tax. So if you make a gift of £300, the whole amount could have a tax implication, not just the £50 over £250.
If you have family members getting married, you might like to support them with a gift.
On top of your £3000 annual allowance, there are additional allowances you could use for loved ones getting married.
up to £1,000 per person – cousin, aunt, nephew, for example
£2,500 for a grandchild or great-grandchild
£5,000 for a child
So let’s say your daughter is getting married this year. You could gift her £5000 specifically for her wedding, plus £3000 to use up your main annual allowance.
Payments for a family member’s living costs
While there is no fixed amount on this rule, money gifts to support living costs for a relative may also be exempt from inheritance tax.
This could be a relative under 18 or an elderly relative.
What about gift tax on larger lottery winnings?
A big lottery win can leave you millions of pounds better off.
So you’re probably thinking bigger than a few thousand pounds to gift to family.
Essentially, there is no limit to how much of your lottery winnings you can gift to a family member or friend tax-free. So if you gifted a million pounds to your family, there would be no 'gift tax' on it.
This relates to the general rule that you can legally gift however much money you like to family or friends.
That said, any amount of money gifted that’s above your annual allowances could be subject to inheritance tax at a later point.
The 7 year rule on gifts
If you gift something – money or an asset – it’s legally still classed as part of your estate for 7 years from the date you made the donation.
The reason for this is to prevent people on their death bed gifting away all of their estate to avoid inheritance tax.
Now the issue with a big lottery win is that the value of your estate will go up dramatically, therefore increasing your potential inheritance tax liability.
John is 50. He’s just won £1 million on the lottery. He wants to give his son £50,000 as a gift.
He’s not used any of his annual allowance yet. So £3000 can go directly to his son and is no longer part of John’s estate.
The remaining £47,000 will still be classed as part of John’s estate for the next 7 years. It’s legally known as a Potentially Exempt Gift.
His son can take the money and spend it. But John dies 5 later. So that £47,000 still forms part of this estate when calculating if any inheritance tax is due on John’s estate when he died.
The beneficiaries of John’s estate, which could well be John’s son himself, could then have a tax bill to pay when inheriting the estate.
John gifts £50,000 to his son. £3000 of that comes from his annual gift allowance.
£47,000 is available for John’s son to spend, but is still classed as part of John’s estate for 7 years.
John dies 8 years after gifting the £47,000 to his son.
It is no longer classed as part of John’s estate. So no inheritance tax liability is of concern.
So when it comes to having a lot of money, gifting some of it away early can actually make sense if you want to avoid a big inheritance tax bill.
So when it comes to giving away lottery winnings to your family, there is really no limit to what you can give. The issue of tax is what you really need to think about.
Anything over the annual allowances or outside exemptions will still remain be part of your estate for 7 years, therefore contributing to the calculation of any inheritance tax owed.
Lottery winnings are tax-free at the point of receiving them. You could pay savings tax on interest earned or your estate could be subject to inheritance tax.
You can share your lottery winnings with family and friends, or give to charity, without you or them paying tax on it at the time of giving. Any winnings gifted could be subject to inheritance based on the 7 year rule on gifts.
If you're looking for financial planning support for a lump sum of money, get in touch with a financial adviser such as myself.