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Make sure it&#39s you, not them

Most IFAs have clients who regularly buy National Lottery tickets through a workplace syndicate.

Playing the lottery may seem simple – you choose six numbers and wait for the inevitable disappointment – but there are two areas that should be given just as much thought as choosing those all-important six numbers.

First, how many clients are aware of the inheritance tax implications of winning the lottery? It could be you…who shares your lottery win with the taxman.

Inland Revenue Statement of Practice E14 issued in 1977 states: “No liability to inheritance tax arises on winnings by a football pool, National Lottery or similar syndicate provided the winnings are paid out in accordance with the terms of an agreement drawn up before the win.

“Where, for example, football winnings are paid out in accordance with a pre-exist-ing enforceable arrangement among the members of a syndicate in proportion to the share of the stake money each has provided, each member of the syndicate receives what already belongs to him or her. There is, therefore, no gift or chargeable transfer by the person who, on behalf of members, receives the winnings from the pools promoter.

“Members of a pools syndicate may think it wise to record in a written, signed and dated statement the existence and terms of the agreement between them. But the Revenue cannot advise on the wording or legal effect of such a statement, nor do they wish copies of such statements to be sent to it for approval or registration.

“Where, following a pools win, the terms of an agreement are varied or part of the winnings are distributed to persons who are not members of the syndicate, inheritance tax liability may be incurred. The same principles apply to premium bond syndicates and other similar arrangements.”

Therefore, if a National Lottery syndicate does not have a written agreement and a win occurs, there may be a gift for inheritance tax purposes by the syndicate administrator to the other members of the syndicate. This would be a potentially-exempt transfer and, therefore, if the administrator died within seven years, the syndicate members could find the Inland Revenue demanding 40 per cent of their winnings.

But tax is not the only issue that should concern members of National Lottery syndicates. It could be you… …who loses a lottery win you thought was yours.

Recently, a wife who paid her husband&#39s stake in a lottery syndicate claimed his share of the winnings as well as her own. In the resulting High Court case, Abrahams v the trustee in bankruptcy of Abrahams, the judge held that she was beneficially entitled to the disputed share of the lottery winnings.

Mrs Abrahams and her husband were both members of a National Lottery syndicate. Following their separation in 1996, Mrs Abrahams continued to pay £1 a week to the syndicate for her own share and £1 for her husband&#39s.

In 1997, the syndicate won £3,632,327. Mrs Abrahams contended that, despite one share being in her husband&#39s name, she had made both £1 contributions to the lottery for herself. She argued this created a resulting trust for a real buyer and, therefore, both shares of the winnings were hers. Her husband&#39s trustee in bankruptcy suggested there could be no resulting trust because her husband had gained no property due to Mrs Abrahams&#39 payment of the £1.

The judge made three rulings. First, he held that Mrs Abrahams was beneficially entitled to the disputed share. Second, that when a syndicate member pays money for the purposes of the syndicate, the payer immediately gains a right to have any winnings governed by whatever rules of the syndicate then apply. Third, that that right is property which is capable of being held on resulting trust.

This judgment, along with the Revenue&#39s position, proves the advantages of having a written agreement, even where there is only a 14 million to one chance of the investment producing a major return.

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