What would you do if you won the lottery? 

If you ask most people, you receive a well-rehearsed answer which normally involves a combination buying their dream property, travelling the world, and quitting their job.

In the UK, the National Lottery has been operated by Camelot since its launch in 1994.

Camelot suggests that the National Lottery creates, on average, 30 millionaires every month.

For prizes of £1 million and up, Camelot arrange a panel in which the winner(s) can meet with a Camelot approved solicitor and independent financial adviser in order to discuss the winner's new-found wealth, what it means for them and what they need to think about. 

The advice for most lottery winners is often: do not rush into anything.  Take your time, take advice, and then make an informed decision as to what you would like to do.  

While winning the lottery is incredibly exciting and often life changing, this may be the first time the winner has had to consider issues like inheritance tax, capital gains tax, higher or additional rates of income tax, capital protection, and the use of trusts. 

They may not have invested funds before so discussions around risk, diversification and return are entirely new.  

There is no "one-size-fits-all" advice for lottery winners and it will always depend on the circumstances including the size of the win, their age, what they want to do with the money, relationships with friends and family, and their overall approach to what the money means to them. 

In terms of legal documents, a well drafted will is always going to be at the top of the list. 

According to research by Canada Life, around 30 million UK adults do not have a will. 

A married couple with minor children may assume that they would be fine, but once you explain that under the intestacy rules the surviving spouse is only entitled to the first £270,000 (together with any jointly held assets and personal possessions) with the balance split between the surviving spouse and the children at age 18, most winners realise they need even a very basic will to ensure the survivor is looked after and their wishes are followed. 

If a winner's family circumstances are more complex, for example a second marriage, difficult family relationships, or children who may be at risk of divorce or financial mismanagement, it is sensible to consider flexible trust structures in their will (i.e. fully discretionary residue) in order to provide greater capital protection. 

This then leads to questions about who the trustees should be and how any accompanying letters of wishes should be structured so that the winner can set out what they would like to happen on their death. 

Inheritance tax (IHT) is often the biggest concern for most winners. 

A married couple with children who win £4 million may have a combined IHT allowance of up to £650,000 on second death (i.e. two nil-rate bands with no residence nil-rate band available based on the value of their estate) with the balance subject to tax at 40 percent. 

Questions about gifting and how long they need to survive suddenly become much more urgent when they realise this could mean paying upwards of £1.3 million in IHT.

A lot of winners will want to discuss buying additional properties. 

From a tax perspective, this is not as attractive as it once was with the three percent stamp duty land tax surcharge, higher rates of capital gains tax (18 percent and 28 percent for residential property gains as opposed to 10 percent and 20 percent for other gains) and restrictions on interest deductions and other finance costs before calculating their profits on any rental income.

This is often something we will discuss in conjunction with the financial advisers so that the winners can understand the costs associated with additional properties (both on acquisition, sale and the ongoing costs of maintaining the property if it’s going to be let out and you need a managing agent). 

Higher and additional rates of income tax, and large capital gains, can often be mitigated by a well-managed portfolio which the financial advisers will often discuss with the winners as part of the cash flow modelling. 

This will of course depend on the winner's needs and whether they require significant income or capital growth but by making use of their CGT annual exempt amount (currently £12,300 for 2022/23 and double if you are working with a married couple) it may be possible to structure their investments in a tax-efficient way while still being able to make use of pension contributions and other allowances. 

I would say that the number one piece of advice for a lottery winner is to take good legal and financial advice. 

Winners need advisers who have a detailed understanding of tax, trusts, will drafting, estate administration (as you will always get a question along the lines of "so if this happened on my death") and how this all fits in the broader picture of estate planning.