What is the tax on lottery winnings? Is gifting lottery winnings taxable? As with any significant windfall, it’s essential to consider the tax implications to ensure that unforeseen tax burden doesn’t diminish your good fortune.
The good news for new lottery winners is that, unlike many other countries, UK lottery winnings are tax-free. However, there are still a few potential tax implications to consider, such as gift allowance and inheritance tax.
Whether you’re a lucky winner or simply dreaming of hitting the jackpot, this article will provide valuable insights into the tax implications and gift tax on lottery winnings in the UK.
Is the lottery tax-free?
Yes, lottery winnings in the UK are tax-free. This means that whether you win the National Lottery, scratch cards, or Euromillions, the full amount of your winnings is yours to keep.
Under UK law, lottery winnings are considered gambling profits and are therefore exempt from income tax, capital gains tax and national insurance. So, if you win £5 million, you’ll receive the full amount without any tax deductions.
Although you don’t pay any taxes on the winning pot, it’s important to note a few potential tax implications related to the winnings. First, any interest earned on the money deposited in a bank account may be subject to income tax. This depends on your overall income and the type of account you have. Second, upon your death, any unspent lottery winnings will form part of your estate. If your estate exceeds the inheritance tax threshold, your beneficiaries may have to pay inheritance tax on a portion of the winnings. Finally, if you are looking to gift part of your winnings to family members or friends, a gift tax may apply.
Gift tax on lottery winnings
Yes, lottery winnings in the UK are tax-free. This means that whether you win the National Lottery, scratch cards, or Euromillions, the full amount of your winnings is yours to keep.
Under UK law, lottery winnings are considered gambling profits and are therefore exempt from income tax, capital gains tax and national insurance. So, if you win £5 million, you’ll receive the full amount without any tax deductions.
Although you don’t pay any taxes on the winning pot, it’s important to note a few potential tax implications related to the winnings. First, any interest earned on the money deposited in a bank account may be subject to income tax. This depends on your overall income and the type of account you have. Second, upon your death, any unspent lottery winnings will form part of your estate. If your estate exceeds the inheritance tax threshold, your beneficiaries may have to pay inheritance tax on a portion of the winnings. Finally, if you are looking to gift part of your winnings to family members or friends, a gift tax may apply.
Annual gift allowance
Every tax year (6 April to 5 April), a UK resident can gift up to £3,000 without triggering inheritance tax implications. This allowance can be used for various gifts, such as birthday presents, Christmas gifts, or other money gifts. If you don’t use your full annual tax-free allowance in one year, you can carry it over to the following year. By combining the annual allowance with any unused carry-over, you can potentially gift up to £6,000 in a tax year.
Other tax-free gifts
In addition to the annual gift allowance, you can give smaller gifts of up to £250 to as many people as you like. However, you cannot exceed the £250 limit for the same person in a tax year if you’ve already used your annual allowance for that individual.
If you have family members getting married, you can also give them larger wedding gifts without paying tax:
- Up to £1,000: For cousins, aunts, nephews, etc. (per tax year)
- Up to £2,500: For grandchildren or great-grandchildren (per tax year)
- Up to £5,000: For your child (per tax year)
For example, if your son or daughter is getting married this year, you could give them £5,000 specifically for the wedding, plus your annual gift allowance of £3,000 within the same tax year.
How much money can I give my family if I win the lottery?
There is no limit to how much of your lottery winnings you can gift to a family member or friend without incurring gift tax. This means you can freely give away millions of pounds to your loved ones without worrying about gift tax implications.
However, it’s important to note that while there’s no “gift tax” on lottery winnings in the UK, any gifted amount that exceeds the annual allowances could be subject to inheritance tax later.
This is because inheritance tax is based on the total value of your estate, including any gifts made within the last seven years of your death. Therefore, while you can give away as much as you want now, it’s essential to consider the long-term consequences for your beneficiaries.
Related: Why Lottery Winners Go Broke: 9 Science-Backed Reasons
The 7-year rule on gifts
Gifts you make, whether they’re money or assets, remain part of your estate for seven years after you give them away. This is called the seven-year rule and is to stop people from avoiding inheritance tax by giving away everything just before they die.
The problem with a big lottery win is that it can dramatically increase the value of your estate, which means increasing your potential inheritance tax liability.
If you die within 7 years of giving a gift, HMRC uses a sliding scale to calculate how much tax the person who inherited your estate or received a part of it as a gift, would pay:
| Years between the gift and your death | Rate of Inheritance Tax to be paid |
| 0-3 | 40% |
| 3-4 | 32% |
| 4-5 | 24% |
| 5-6 | 16% |
| 6-7 | 8% |
| 7+ | 0% |
Inheritance tax on lottery winnings
Inheritance tax (IHT) is a tax paid on the value of your estate when you die. If you win the lottery and don’t spend it all before you pass away, it will be included in your estate.
Key points to remember:
- Inheritance tax threshold: You can pass on a certain amount of money (called the nil-rate band) without paying IHT. At the moment, this limit is £325,000 (or £500,000 if property is left to a child or grandchild). For any amount on top of this, the standard inheritance tax rate in the UK is 40%.
- Potential exemption for gifts: If you give away some of your lottery winnings before you die, it can reduce the inheritance tax liabilities.
- 7-Year Rule: Gifts made within the last seven years of your death may be included in your estate for IHT purposes.
- Spousal exemption: If you gift your lottery winnings to your spouse or civil partner, there is generally no IHT due.
- Charity gifts: Gifts to registered charities are usually exempt from IHT.
Gifting lottery winnings to family and friends: Examples
1. Small gifts to multiple recipients
- Situation: You win £10,000 on the lottery and want to distribute part of it among your family and friends.
- Action: You can give each recipient up to £250 without triggering inheritance tax, as long as you don’t exceed the annual gift allowance for any individual. For example, you could give £250 to each of your 10 closest family members and friends.
2. Large gift to a child
- Situation: You win £1 million and want to give a significant portion to your child as a financial head start.
- Action: You could gift your child the annual gift allowance of £3,250 each year. Technically, you could gift the entire 1 million pounds to your child, however, any amount exceeding the yearly allowance could be subject to inheritance tax if you die within seven years of giving the gift.
3. Gifting to a charity
- Situation: You want to donate a portion of your lottery winnings to a charity.
- Action: Gifts to registered charities are generally exempt from inheritance tax. You can donate any amount you choose without incurring tax implications.
Summary: Tax on lottery winnings UK
Lottery winnings are tax-free when you receive them. However, you may be liable for savings tax on any interest earned, and your estate could be subject to inheritance tax.
You can share your lottery money with family and friends, or donate to charity, without immediate tax implications. Regarding gift tax on lottery winnings, there is no specific gift tax in the UK. However, any gifts may be subject to inheritance tax under the 7-year rule on gifts.
If you need professional advice for a large prize or windfall, it’s a good idea to contact a financial advisor or tax planner.
