A record-breaking £195 million lottery prize won tax-free?
- TBA
- Mar 22, 2024
- 5 min read
In the UK around 45 million people regularly play the lottery. Although the vast majority of them have never won anything, there are still some lucky ones who have won big prizes.
One lottery player won a £195 million lottery jackpot, breaking the record for the highest lottery prize ever won.
What can £195 million buy?
This amount of money could buy 11 Boeing 747 airplanes, 23 Pisces-VI submarines, or even multiple luxury townhouses near Southampton Football Club or London’s Mayfair!
1. How have winners spent their money?
Colin and Chris Weir from Largs, North Ayrshire, broke records in July 2011 by becoming the largest lottery winners in the UK at that time.
Colin invested £2.5 million in his beloved Partick Thistle Football Club, naming one of the stands at the stadium after himself. He later acquired a 55% stake in the club, which was eventually transferred to the local community after his passing.
The couple also established the Weir Charitable Trust in 2013 and donated £1 million for the Scottish independence referendum in 2014.
Adrian and Gillian Bayford won €190 million in the EuroMillions lottery draw in August 2012, amounting to just over £148 million. According to the Mirror, the couple purchased a Grade-II listed property in Cambridgeshire, complete with a luxury cinema and snooker room, but it was sold a few years after their divorce.
Former social worker and teacher Frances and her husband established two charitable foundations after winning nearly £115 million on New Year’s Day in 2019. It has been reported that she has donated £60 million to charitable causes as well as to friends and family.
2. Do taxes need to be paid on lottery winnings?
The answer is quite simple, no. In the UK, lottery winnings are not considered taxable income. However, income tax must be paid.
Once you deposit the money into the bank, it will inevitably start accruing interest. Since this interest is not part of the original windfall, income tax is paid on the interest – this is personal income tax.
Although questions have been raised over whether the interest earned is simply part of the original earnings, HMRC has never provided a definitive answer.
Additionally, inheritance tax must also be paid.
In the UK, if the value of an estate exceeds £325,000, inheritance tax is due. So, if the winnings are passed down as inheritance, then the inheritance tax rate of 40% is applicable.
What if the winner gifts the money to someone before their death?
It is possible to gift up to £3,000 per year to others tax-free, and this amount is not added to the estate. Moreover, if the previous year’s tax-free allowance hasn’t been used, it can be carried forward for one year, allowing a total tax-free allowance of £6,000 for the next year.
Furthermore, HMRC stipulates that when money or assets are gifted, they remain part of the estate for seven years after the gift is made. This means if the winner gifts the money to a relative or friend and passes away within seven years, the money will still be considered part of the estate, and the recipient will be liable to pay tax on the gifted amount.
For example, let’s say A wins a lottery and wishes to gift £50,000 to his son. Since A has a tax-free allowance of £6,000 (not gifted to anyone in the previous year), £44,000 remains part of A’s estate in the year A gifts the money to his son. If A unfortunately passes away two years later, his son would need to pay inheritance tax on the £44,000. However, if A passes away after ten years, the gift has surpassed the seven-year period and is no longer part of A’s estate, so his son wouldn’t need to pay any tax on it.
3. When is inheritance tax due?
HMRC stipulates that the executors of an estate must pay within six months after the individual’s death. If payment is not made within this timeframe, HMRC will begin to charge interest. Additionally, executors can opt to pay tax on certain assets, such as property, in instalments over ten years. However, any unpaid tax will still accrue interest.
If any assets are sold before all personal income tax is paid, executors must ensure that all instalments and interest are paid at that time. If your estate incurs personal income tax, it’s advisable for the executors to make partial payments within the first six months after death, even if they haven’t completed the valuation of the estate. This will help reduce the interest the estate may generate.
If the executors or administrators pay tax from their own accounts, they can reclaim it from the estate. If personal income tax is overpaid during the probate process, HMRC will refund the estate. Remember, if appointed as an executor or administrator of an estate, it’s necessary to complete and submit an estate account within one year after the deceased’s death to avoid penalties.
4. Planning ahead
Perhaps you haven’t won the lottery, but you may have other assets you would like to pass on. What is the most tax-efficient way to do this?
Giving Gifts While Alive
Gifts during one’s lifetime can reduce some expenses:
Annual exemption – Each person can gift up to £3,000 worth of gifts in each tax year without it being added to your estate’s value. If you haven’t used last year’s exemption, it carries over to this year, making your annual exemption total £6,000
Wedding or civil ceremony gifts – In addition to the annual exemption, you can leave wedding or civil ceremony gifts of up to £1,000 per person. If it’s for grandchildren or great-grandchildren, this amount increases to £2,500; if it’s for children, it’s £5,000
Small gifts exemption – Provided you haven’t used any other exemption on the same person, you can also give gifts worth up to £250 to any number of people in each tax year
Taking this into consideration when drafting a will is crucial.
If your estate’s value exceeds £325,000, giving money while you’re alive may be more tax-efficient. However, it’s essential that gifts are made outright, or they may not achieve the intended tax effect. For example, if you transfer property to your children but continue to live there and benefit from it, the gift may not qualify for exemption.
Leaving Money to Charity in a Will
Anything left to a charity is exempt from inheritance tax. If you leave an estate worth £350,000, including a £30,000 charitable donation, no inheritance tax is due. This is because your taxable estate value would be calculated as £320,000 (£350,000 minus £30,000), which is below the £325,000 inheritance tax threshold. Furthermore, you can also reduce your inheritance tax rate by leaving over 10% of your net estate to charity.
Putting Pensions and Life Insurance Policies into Trusts
Pensions and life insurance policies can be great ways to minimise tax bills.
Trusts may be needed for both types of policies, often meaning any payouts won’t form part of your estate but will go directly to your beneficiaries, without incurring inheritance tax.
Leaving Everything to Your Spouse
If you’re married or in a civil partnership and your partner is domiciled in the UK, regardless of the value of your estate, they won’t have to pay inheritance tax on what you leave them.
Married couples and civil partners can also pass on their unused exemptions to their partners, significantly increasing their partner’s exemption allowance.
Leaving the House to Your Children
In April 2017, a ‘main residence’ nil-rate band was created.
If homeowners leave their homes to children, stepchildren, or grandchildren—or their spouses or civil partners—they can get an additional £175,000 of the nil-rate band allowance.
If you have any questions about inheritance tax, contact TB Accountants. Our professional accountants can discuss and help you plan ahead for inheritance tax.