You have probably heard the old trope that is trotted out whenever lottery winning is discussed. “You’ll lose half of it to the tax man!” is quite a normal response to hear after the discussion of what you will be buying with your imaginary winnings starts to wane. But how accurate is this statement? Will you really be losing half of your winnings to the government should you happen to be lucky enough to pick the right numbers?
Tax on lottery winnings
Well, if you are a UK resident and are reading this because you have just check your numbers and are currently panicking about your options, then relax, we have some good news for you. In the UK, you are not liable to pay any tax on your winnings at all, whether that is a national lottery or a foreign online lottery. But before you start rubbing your hands together and planning where all this money is going be spent, it is worth noting a few caveats that could lead to issues, if you aren’t careful.
Yes, your lottery win is tax free, but the minute you actually pocket that cash, you are liable for inheritance tax should you die and pass on the winnings in your will. This is most probably not news to UK residence, but what may come as a shock, is that gifts that are bought through lottery winnings will be subject to the inheritance tax should the gift giver die within 7 years of the gift being made. This has landed a few beneficiaries of lottery wins out of pocket following the death of a relative or friend who was generous enough to share their good luck with their nearest and dearest. Whether it is a car, home, or any other substantial gift, it will be liable for IHT should the worst happen in those 7 years. This obviously does not apply to married couples, but if you are thinking of passing on some of those winnings tax free to their children, it may be a better option to treat them to a present earlier rather than later.
Play in the UK, win anywhere
Tax free lottery winnings are not universal the world over though, and in fact most other countries look at lottery wins in the same way that they view any income, and will tax it accordingly. Playing overseas lotteries as a UK resident however, means that you will be declaring your winnings in the UK, and as such are protected by the rules of the land. This actually puts UK players of genuine online lottery sites at quite a distinct advantage when they play online, when compared to their international counterparts.
The Inheritance tax rule can however cause some issues for those lottery players who play as part of a syndicate, as unless you have a syndicate agreement plan, the purveyor of the ticket itself is classed as the winner, and those to whom they share the winning (the other syndicate members) as recipients of a gift. There are, however, agreements that can be drawn up online that cover syndicates for this legal issue. The basic takeout from this is to get things drawn up properly, rather than relying on a vocal agreement. If, for example you are playing the Nation Lottery in the UK, they even provide a service to set up your syndicate officially.
Uk lotto players in general should feel rather pleased with the way the law works in this instance, and with a little planning, those big winners needn’t land their family and friends with huge bills should they decide to leave them with a substantial amount of money. It is also perhaps a little trite to be worrying about lottery winner’s finances, but seeing as more than a couple of winners and their families have been bitten by huge tax bills that weren’t expected, it pays to make sure you know all the facts as early as possible.
The UK is a great place to play lotteries, but depending on what the next few years hold for the winner, it can be a difficult place to know exactly what to do with such a vast amount of money, should you win. If you happen to be in this position, enjoy the problem the rest of us wish we had, and it wouldn’t be a bad idea to instruct a financial adviser to look over your particular situation and advise you on the best way to invest, gift, and make your money work for you.