Are gifts from lottery winners subject to inheritance tax or capital gains tax in the UK?
Executive summary
UK law treats lottery winnings themselves as tax‑free: winners do not pay Income Tax or Capital Gains Tax on the prize (multiple industry and HMRC‑based guides note this) [1] [2]. However, gifts made from winnings can affect Inheritance Tax (IHT) if the giver dies within seven years, and income or gains generated after investing the winnings are taxable [3] [2].
1. Lottery prizes: a clear windfall, not taxable income
HMRC and multiple tax guides consistently treat lottery and gambling winnings as exempt from Income Tax and Capital Gains Tax: the prize you receive is classified as “winnings from betting, gaming or lotteries” and is not treated as earned income or a capital gain [1] [2] [4]. Industry guides — from the National Lottery’s own FAQ to accountants’ briefings — repeat the same point: the cash paid to a named winner is received tax‑free [5] [6] [7].
2. What becomes taxable is what you do next with the money
While the initial jackpot is tax‑free, any future returns from that money are taxed like comparable income or gains: interest on bank deposits is subject to Income Tax; dividends and rental income are taxable; and gains from selling investments may attract Capital Gains Tax [7] [8] [9]. Several advisory pieces emphasise winners should expect HMRC to tax investment returns, not the prize itself [8] [10].
3. Gifts from winners: immediate freedom, longer‑term IHT risk
Gifting cash to others is allowed and not taxed as Income Tax or CGT at the moment of transfer, but such gifts are treated under IHT rules as “Potentially Exempt Transfers.” If the giver dies within seven years, those gifts can be brought back into the estate calculation and may trigger IHT above the nil‑rate band (£325,000) [3] [11]. Gov.uk guidance and money‑advice sites explain the seven‑year rule and taper relief for gifts made 3–7 years before death [3] [12].
4. Recipients: no automatic capital gains bill on received cash, but watch the asset type
Available sources make clear cash gifts themselves don’t create an immediate Capital Gains Tax liability for recipients. However, if a gift consists of an asset (shares, property), capital gains tax can arise either on disposal by the recipient later or — in some gift situations — at the time of transfer depending on the asset and reliefs claimed [13] [14]. Advisory pieces warn that non‑cash gifts can trigger CGT consequences for donor or recipient [13].
5. Practical allowances and exemptions winners should use
Standard IHT allowances still apply to lottery winners: the £3,000 annual exemption and small‑gift exemptions (£250 per person, wedding gifts etc.) can shelter transfers from IHT if used properly [3] [15]. Gifts to spouses and qualifying charities are treated favourably under IHT rules; charities are exempt and transfers between UK‑resident spouses are generally tax‑free [3] [16].
6. Common misunderstandings and where reporting is required
A frequent misconception is that any payment of a windfall must be declared as income — sources explicitly contradict that: you do not need to pay Income Tax or CGT on the lottery prize itself, nor declare it as earnings, though you must account for taxable income generated afterwards [1] [4] [5]. Another error: thinking gifts are simply “gone” for IHT — gifts over the nil‑rate band remain risky if the donor dies within seven years [11].
7. Two perspectives winners should balance: generosity vs estate risk
Financial advisers and HMRC‑based guidance present competing priorities: gifting large sums during life reduces an estate subject to IHT if the seven‑year survival condition is met, but doing so close to death can backfire and trigger large bills for beneficiaries [11] [17]. Some guides therefore recommend staged gifting, use of exemptions, charity donations, or professional estate planning [18] [16].
8. Bottom line and action points
The prize is tax‑free; tax authorities tax what the money then earns or how it’s treated in estate calculations [1] [2]. Winners should: (a) separate capital and income planning (expect tax on interest/dividends/gains) [7] [9]; (b) use IHT exemptions and heed the seven‑year rule before relying on gifts to shield the sum from IHT [3] [11]; and (c) seek regulated tax and legal advice for bespoke estate planning — sources uniformly recommend professional advice for large, complex wins [8] [18].
Limitations: available sources do not mention any one‑size cap or a special “gift tax” applied at the moment of transfer in UK law beyond the IHT framework; specifics (exact sums, recent legislative changes) should be checked with HMRC or a qualified adviser [3] [2].