When you win a large prize in the lottery, the last thing you want to think about is how much tax on lottery winnings you’re going to have to pay. People across the UK win millions of pounds every year, but do you actually win that much, or is a large amount taken out in tax?
You do not have to pay tax on lottery winnings within the UK, which is good news for UK players. HMRC does not consider lottery winnings to be taxable, so you will be able to take home the entire sum of your winnings, no matter how much you have won.
However, you may find you have to pay tax in the future.
If your lottery winnings take the value of your estate to over £325,000, you may be liable to pay 40% inheritance tax when you pass away.
If you plan on giving money to your relatives or friends, you may still have to pay inheritance tax if you pass away, up to seven years after gifting your lottery winnings. The exact amount that will be taxed is calculated on a sliding scale. If you pass away between three and four years of gifting, there is a 20% reduction in tax. Then a reduction of 40% between four and five years.
This effect on inheritance tax can cause potential problems if you won the lottery in a syndicate. In this instance, the person who received the winning cheque will be liable for inheritance tax. However, there are ways to protect yourself from having to pay tax.
HMRC states “no liability to inheritance tax arises on winning 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.”
So before paying out a syndicate, make sure you draft an agreement to avoid having to pay inheritance tax. If you’re gifting some of your winnings, ensure the recipient signs an agreement stating they will pay the inheritance tax.
Inheritance tax isn’t the only issue you may find. Any income from your lottery winnings, such as interest or investment returns, is taxable.
The initial answer is no, you do not pay tax on lottery winnings. However you may find you will have to pay in the future. Especially if you do not have any written agreements in place.
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