Protecting clients’ winnings from an unexpected bill

At least some of your clients are likely to club together to play a lottery - known formally as a “syndicate”. Winning could however lead to a nasty tax bill - how can you ensure this doesn’t happen?

Syndicate

Offices all over the country run lottery syndicates. Staff members will usually put in an agreed amount each week, and a designated employee will use the pooled funds to buy tickets. If the lucky numbers come up, the prize will be shared equally. Smaller prizes might be used to buy extra tickets, of course.

IHT problem

A little known issue arises because of how the prize is paid out. Essentially, only one person, i.e. the designated employee, can claim the prize. They are then responsible for distributing the winnings out to the other syndicate members. The problem is that because, strictly, the designated employee is distributing their own funds, it is a potentially exempt transfer (PET) for inheritance tax (IHT) purposes. If misfortune should strike the designated employee within seven years, their next of kin might find themselves with a very nasty tax demand.

Example. Lorraine runs the lottery syndicate at Acom Ltd, where she and five other employees put £5 per week into a fund to play the Euromillions game. In May 2017 they hit the jackpot and win £12 million. An ecstatic Lorraine claims the winnings, and promptly pays out £2 million each to the syndicate members (who immediately give up work).

Lorraine books a holiday to Australia in August 2017, but is tragically stung by a highly poisonous jellyfish whilst swimming and dies shortly afterward. Whilst conducting probate, HMRC informs the executors that the distribution of £10 million to the other members is a failed PET and that IHT will be due. The bill is an eye watering £3.87 million. HMRC usually pursues the recipient of the failed PET for payment, i.e. the other syndicate members.

A simple sidestep

Fortunately, it is relatively easy to alleviate this problem - provided steps are taken before any win arises. The solution is to ensure that the designated employee is merely acting as a nominee, or bare trustee, on behalf of the other members. That is to say, when they receive the pay-out they are merely collecting winnings on behalf of all the members. The distribution of those winnings is then not a gift, and so cannot be a failed PET. This can be initiated by a simple agreement between the members (see Follow up).

Pro advice. Whilst a verbal agreement can be binding, it is harder to prove. We recommend using a written agreement. This doesn’t need to be filed with HMRC. However, it may be requested if the designated employee dies.

The agreement needs to include details of all syndicate members, set out their weekly/monthly contribution, and their agreed share of any prize that may be won. This should be updated for any new starters, as IHT may be applicable if distributions are made to anyone not detailed in the agreement.

Advising

Whilst the odds of actually winning a large prize are relatively low, you should advise your clients of this problem when you see them in order to be proactive.

Follow up - Lottery syndicate agreement

The issue arises because when the syndicate leader transfers the funds from a win to other members, they are technically making a gift - which can lead to IHT if they die within seven years. Advise your clients to use a syndicate agreement to ensure a nominee arrangement exists to avoid a charge.