This is the kind of tax-planning problem we would all like to have. Given that winning or, more likely, accumulating one million pounds is not so rare these days, what steps should you take to keep as much of it as possible out of the hands of HMRC? We will assume you are a longstanding UK tax resident and will remain so.
Keep the paperwork
If you have just come by a large sum of money unexpectedly, the paperwork might not be the first thing on your mind. Of course, if you are lucky enough to be one of the only two premium bond holders per month who win a million pounds, your win will be well-documented. Success in the National Lottery should equally be independently verifiable. In the event that it came from betting or gaming, you need to keep third-party evidence to be able to defend yourself against any unwanted accusations of tax fraud or even money-laundering. Digital and cyber receipts need to similarly be well documented.
Is it taxable?
Lottery wins and premium bond prizes are not taxable. Winnings from betting are also free of tax. If your windfall is a legacy from a deceased person’s estate, the executors should have sorted out the tax before distributing the funds. In terms of you being subjected to UK taxation, you need to be concerned if the million pounds is either attributable to the disposal or deemed disposal of a capital asset or right, or if there is some sort of “trade taint”, that is a receipt correctly attributable to your your trade, profession or work.
Spend, spend, spend
In our experience, the population is divided evenly into spenders and savers. If you are a spender, we can assume that the million pounds will find its way back into the economy relatively quickly, yielding many opportunities for the taxman to take a share. For example, if you buy a brand-new Lamborghini, expect it to set you back about £600,000 (standard trim!). HMRC will collect £100,000 in VAT and the DVLA will get £5,000 plus in vehicle excise duty. Alternatively, supposing you use all the money to buy a house, your first and only home – then stamp duty land tax, payable by you, will amount to £43,750.
The rainy day fund
Some will decide to put the money aside for old age or unforeseen emergencies. Opportunities to shelter it from tax are limited though. The most you can invest in an ISA in any one year is £20,000 (for now, please check rates at the time you make the investment), and if you are considering pension contributions, you can only pay the equivalent of your annual earnings up to a maximum of £60,000. (You should always seek professional advice before making investment decisions including paying into a pension fund).
The philanthropist
You may be moved or persuaded to share your good fortune with others. Gifts to registered charities fall outside the scope of Inheritance Tax (IHT) and where they are made of taxable income by Gift Aid, their value is enhanced from the recipient’s point of view, plus the donor gets higher rate tax relief.
If, for you, charity begins at home, you will no doubt consider making gifts to family members. Such generosity will consequently reduce the value of your assets and therefore reduce the IHT liability on your estate when you die. There is currently no IHT liability on lifetime gifts to individuals but if you die within seven years of making a gift it will be added to your estate for IHT purposes. The percentage of the gift added to your estate reduces gradually over the seven years.
Other fairly small gifts are exempt from IHT and annual gifting to utilise these is a sensible IHT strategy to adopt. But the bigger exemptions/reliefs worthy of more comment here are as follows:
- regular gifts out of your surplus income
- payments to assist with an elderly relative or dependent child’s living expenses
- gifts to charities and political parties
- efficient use of nil rate bands
More IHT planning
Let’s assume that you don’t spend or give away the money you have won so that it remains part of your estate when you die. All gifts on death to your UK-domiciled spouse are outside IHT. For other transfers, the first £325,000 of your net assets is not taxed (nil rate band), and often, if your spouse has died before you without using his or her nil rate band, that can also be claimed, meaning that the first £650,000 of transfers on death by you is tax-free. If the value is in residential property (maybe that is how you spend the £1 million), then the nil rate band can be increased by a further £175,000 per spouse if you leave your family home to your children or grandchildren and provided the value of your estate is less than £2 million. This relatively simple “life-planning” is worth £400,000 of IHT so should not be missed.
Investing your £1 million into the qualifying family business or farm will in most cases eventually still secure a relatively favourable IHT rate (nil for the first £1 million, 20% for the excess) when compared with other investments, but this is clearly well short of the 100% relief that was available prior to the restricted reliefs imposed from 6 April 2026 (earlier for certain transfers).
Having claimed the above reliefs, the balance of your estate is taxed at 40%. Of course, at that point, it will be your children’s problem, not yours. However, there are steps you can take during your lifetime to maximise the amount you pass on to your children. Even if you haven’t just won a million pounds, it would be a good idea to ask us to review your affairs and advise you on planning for the inevitable.
The next step
As ever, we are here to help. If you have any questions, please get in touch with your usual UHY contact, or one of our experts here, starting with the author, David Jones on d.jones@uhy-rossbrooke.com.
