We’ve all had dreams of winning big in the lottery. The thought of the numbers perfectly aligning and holding up that large cheque is enough to make anyone rush to their local corner shop.
Due to how large these winnings can be, you may be thinking about how much tax you will need to pay.
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Take a look at our guide below to determine whether or not your winnings are taxed, and if so, by how much!
Is tax payable on lottery winnings?
Technically, lottery winnings are classed as gambling winnings which means lottery winners won’t need to pay income tax on their lottery cash.
Any money from winning the National Lottery will incur no capital gains tax or extra-national insurance too!
However, it’s not all tax-free – you may need to pay inheritance taxes if your winnings take your overall estate value to greater than £325,000.
This can also still apply if you decide to gift a large sum to your parents, friends, or other family members.
How does inheritance tax apply to lottery winnings?
Once entered into your bank account, your winnings will be classed as part of your estate.
If the value of your estate is now greater than £325,00 then you may need to pay up to 40% inheritance tax (IHT).
These tax implications may reduce your overall winnings by a huge sum.
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On top of this, once you pay inheritance tax, gifts you give to friends or family members can also be taxed.
Be sure to keep this in mind when determining how much cash you have truly won from the lottery.
You may be tempted to gift a percentage of your winnings to friends or family to avoid the added tax on the lottery but sadly this may not work.
The only way this can truly be avoided is if it’s been over 7 years since the money gifted was received or if the person you are gifting cash to signs an agreement to say they will pay any necessary tax.
Anyone who receives money from you as a gift may also need to pay gift tax.
This is only the case if the gifted amount is greater than £3,000 but it’s still worth considering before you start gifting friends and family.
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If you die
If you die within 7 years of gifting your lottery winnings, then anyone who received winnings from you may need to pay your IHT.
The amount will change based on a sliding IHT scale, starting at a flat 20% IHT tax reduction if it’s been between 3 and 4 years since you sent the gift.
As any cash gifted to friends or family is still classed as a chunk of your estate until 7 years have passed, you may want to reconsider how much you give away.
Tax on lottery can be frustrating, but when you consider how much you could win, it’s not all doom and gloom!