“Tax? Lottery wins are tax free aren’t they?”

It is indeed the case that there is no income tax charged on lottery winnings, whether you win £10 or £100 million. But for those of us who have dreamt of a big win, few of us will have considered the slug of inheritance tax that our estate could owe after we die. It is worth planning for: the inheritance tax bill could be a champagne-curdling £40m on a £100m EuroMillions win!

Unfortunately, the older you are, the more inheritance tax could be an issue as you may have less time to plan for the tax. The family of lottery winner Bob Bradley discovered this after Mr Bradley won a £3.5 million jackpot aged 83. The press reported that Mr Bradley elected to gift his win to his family, including a £70,000 Mercedes to his son. Sadly Mr Bradley died soon after the win and within seven years of making those gifts, meaning that most of the gifts would have been liable for inheritance tax. If Mr Bradley had not set aside the money for the tax as a contingency, it may have meant the family had to sell those gifts to meet the inheritance tax bill.

So, is it possible to plan for inheritance tax on a lottery win?

Let’s assume you have won a cool £100m on a Friday night. Here are ten tax tips to keep in mind when you are planning what to do with the win:

1.    Hope for the best; plan for the worst – most of us would consider giving some cash away to family and friends. Maybe pay-off your siblings’ mortgages or buy your mum her dream house. You can give £3,000 away as tax-free gifts each year using your annual exemption. After that any gifts are known in tax law terms as ‘Potentially Exempt Transfers’, which is commonly known as the ‘7 year rule’. In simple terms,  this means that if you do not survive 7 years, up to 40% of the value of the gift could be owed in inheritance tax. If you want to make tax-free gifts to your family, it may be prudent to keep enough back to cover any tax should you not survive those 7 years, or consider covering that contingency with a life insurance policy.   

2.    Syndicates beware – if you have an informal syndicate that involves one of you being responsible for collecting in the money and buying the ticket (the National Lottery call this person the ‘syndicate manager’), HMRC may view the syndicate manager as the legal owner of the entire jackpot and view the distribution to the syndicate members as gifts. In the tragic event that the syndicate manager dies within 7 years of sharing out the jackpot, this could be a tax disaster as the syndicate shares could all potentially be taxed as gifts!

For example: a syndicate of ten wins £100m. There is no syndicate agreement and the syndicate manager divides the £100m jackpot ten ways with each syndicate member receiving £10m. The syndicate manager sadly dies 2 years later. The 7 year rule says that those gifts have ‘failed’ and so £4m (40%) is owed in inheritance tax on each of the nine gifts to the other syndicate members. If the syndicate manager’s estate doesn’t have that £36m to pay the tax bill, the estate may be declared bankrupt and each syndicate member will potentially be pursued for up to £4m in inheritance tax.

We recommend that all lottery syndicates consider a binding syndicate agreement which aims to avoid this scenario – the National Lottery provides guidance on good practice for syndicates on its website.

3.    Get married – tax efficiency isn’t the most romantic reason to get married, but the spouse exemption means that all gifts between married couples are exempt from inheritance tax. The same rules apply for Civil Partnerships. So if you are considering proposing, remember that anything that you leave to your other half will pass to him or her free of inheritance tax. By virtue of being married, you should be able to postpone the payment of inheritance tax until after the second death. Health, wealth and happiness!

4.    Too much too soon – It is a common-held concern amongst our clients that too much wealth given to young people too soon risks having a detrimental impact on their life choices. Trusts and family investment companies used in the appropriate circumstances can be useful tools to pass wealth down the generations in a responsible way. For example, a trust could be set-up so that the children benefitting from the trust fund do not receive the wealth until they reach a certain age.

5.    Prenuptial agreements – This is less about tax, but equally relevant for wider ‘asset protection’. Prenups, postnups and cohabitation agreements are becoming increasingly popular for families fearing the prospect of matrimonial difficulties and seeking to preserve family wealth in the bloodline should there be a messy divorce later down the line.

6.    Give to charity – any gifts to charities are free of inheritance tax. Keep in mind also the ‘10% rule’ when making your Will which means you could reduce the inheritance rate applicable to your estate from 40% to 36% if you gift 10% or more of the total value your net estate to charity.

7.    Buy a business – given that most people would give up work after a jackpot win, investing in a business may not be at the top of your lottery bucket list. It is worth considering though, as any qualifying shares held in a trading business could be exempt for inheritance tax after 2 years. Therefore, by investing a chunk of your jackpot in the right business, you could be shielding that investment from inheritance tax. Recent changes in the 2024 Labour Government budget will reduce the tax advantages of this strategy from 2026 but it remains an inheritance tax exemption to consider.

8.    Buy a farm – in a similar vein to owning business assets, agricultural property or woodland can also be exempt from inheritance tax. You may have read about some of the UK’s richest people buying up farmland; inheritance tax might be one of the reasons why. Again, the 2024 Labour Government budget limits the tax planning advantages form buying agricultural property, but doesn’t remove them.

9.    A place in the sun – any overseas property is likely to be taxed in accordance with the laws of the country that it is situated. Plus, that country’s laws may also have a bearing on who would inherit that property. A Will is crucial to protect your UK assets and, if you have foreign assets, we recommend that you take advice on the inheritance tax laws in that country also as it is likely that you will need a local valid Will put in place there too.

10. The tax chain – This is about kicking the can down the inheritance road. By gifting wealth you inevitably increase the asset base of the person receiving that wealth. Therefore, any gifts made under your Will also have the same effect. Consequently, the inheritance tax that you may save by gifting the assets may simply be paid by the recipient’s estate later down the line if they do not plan appropriately. You may also put those assets at risk from other threats such as bankruptcy, matrimonial issues or profligacy. Consider mitigation strategies for these risks both during your lifetime and through your Will

In conclusion, “It could be you” so, if you do win big, consider these tips. Good luck!

Disclaimer: This article provides general information and should not be considered legal advice.