Can selling your property by lottery save on tax?
There has been a wave of stories and articles recently about selling residential properties via a lottery or raffle. The aim of these schemes is to reduce or eliminate tax bills that would otherwise occur if you sell your property for more than you initially paid for it. Currently, there are around 20 properties being raffled off in the UK.
Dustan Low managed to make £1 million when selling his Lancashire home via raffle. Without any legal advice and just one press release in the local newspaper, he managed to make £103,000 worth of ticket sales in a single day. However, Low credits his success to the fact that, at the time, he was facing bankruptcy and that exposing his “dire financial straits” struck a chord with the public, leading to mass sales of the £2 tickets.
So how does it work?
If you’re looking to operate a public lottery or raffle, you’re required to register for lottery duty and draw up legal terms and conditions for the scheme. This can be very difficult and expensive as it’s a very specialised area so you will most likely need to seek expert advice. You will also be liable to pay lottery duty (12%) on the value of the tickets sold which will eat into your income.
If the raffle is deemed illegal by the Gambling Commission, you could be looking at a fine of up to £5,000 and a 51-week prison sentence. The Gambling commission has shut down more than 100 unlawful property raffles since house prices dropped in 2008.
“We have intervened in schemes where we have had concerns that they are unlawful lotteries. These have either closed or been changed so they are compliant with the law,” a spokesperson said. “We will monitor the situation in the coming months and will continue to step in if we have concerns that any free draw or competition is in fact an illegal lottery.”
The problem many organisers will face is that, in general, the Gambling Commission and HMRC will only allow the lawful selling of tickets for raffles and lotteries if they’re for ‘good causes’ – such as charities, local authorities and not-for-profits.
HMRC will usually take the view that operating a lottery for gain or profit constitutes a business – even if it’s a one off. When you transfer personally owned assets to a business, tax rules treat it as if it were a sale/purchase of trading at market value (MV). You won’t avoid capital gains tax (CGT) due to being deemed to have sold your property for what it’s really worth before the lottery takes place.
If your ticket sales exceed the MV of the property, the excess is taxable profit on which you are required to pay income tax at up to 45%, depending on any other income you may have. On the plus side, if you manage to sell enough tickets to more than cover your costs plus the sum you were hoping to gain from the property, you will be much better off than you would be by selling your property the conventional way. However, there is no tax advantage.
In the end, the only participant that really gains is the winning ticket holder. Not only have they got the bargain of the century but they also don’t have to pay stamp duty land tax (or the equivalent in Scotland & Wales) due to the price of the ticket being below the level at which it kicks in. The downside is, if they decide to sell the property they might receive a higher tax bill (unless they have occupied it as their home). This is due to the price of the ticket, when they sell the property for more than they paid for it, the difference is taxable.
What are your thoughts on selling property by lottery? Is it a risk worth taking?
Get in touch if you’d like to discuss any of the above in more detail.