Winning a multi-million dollar property in a prize draw can be a dream come true… but you could incur a hefty tax bill if you sell it for a profit
- Selling a house won in a prize draw can create a tax liability if sold for a profit
- The tax due can run into the tens of thousands of euros if the profit is significant
- We calculate the tax on a house price of £2.5 million that is sold for a profit
Winning a multi-million dollar home in a contest may seem like a dream come true for many people.
But it can also create a tax burden if you cash in and sell the property instead of using it as your primary residence.
We spoke to leading accountant Nimesh Shah of Blick Rothenberg about the tens of thousands of pounds that could be due in capital gains tax in such circumstances.
It follows a couple who put their ‘dream’ property in Kent on the market for £2.65 million after winning it in a prize draw last year.
A couple put their ‘dream’ property in Kent (pictured) on the market for £2.65 million after winning it in a prize draw
The Midlands couple won the £2.5 million luxury home via a drawing on website Omaze in autumn last year.
They described the victory as “beyond their wildest dreams” and continued that it changed their lives forever.
However, what they may not have known when they made the decision to sell the property was that a potential capital gains tax was due.
Capital gains tax is a tax on the profit when you sell an asset – such as real estate – that has increased in value.
Mr Shah explained: ‘When someone acquires the property through a lottery in this way, the capital gains tax base value is taken to be the market value of the property at the time they acquired it.
Assuming the market value of the property when won is £2.5m – as advertised in the lottery – that becomes the basic cost of the prize winner.
‘If they then sell the property for £2.65 million, they book a capital gain of £150,000. This is calculated by taking £2.65 million and deducting their basic capital gains cost of £2.5 million.”
What the winners of a property in a prize draw may not have known when they made the decision to sell is that capital gains tax may be due
Mr Shah went on to calculate the tax due on this capital gain, saying that the annual capital gains exemption would need to be deducted, which is currently £12,300. This will be reduced to £6,000 from April 6, 2023 and £3,000 from April 6, 2024.
He added: “It would be possible for the seller to deduct any associated sales costs, such as brokerage fees or legal fees, to calculate the taxable profit.
‘If the seller is a higher tax payer – income in excess of £50,270 – the capital gain is taxed at a flat rate of 28 per cent.
‘Based on the capital gain of £150,000, the taxable gain is £144,000 – excluding any associated selling costs and less the annual capital gains exemption of £6,000, assuming the sale takes place after 5 April 2023.’
It means the associated capital gains tax is £40,320 – that’s 28 per cent of £144,000.
The seller would have to report to HMRC within 60 days of selling the property and pay the associated capital gains tax.