It’s a lottery
The aim of the scheme is to reduce or eliminate a potential tax bill that would otherwise result if you sold your property for more than you paid for it. Does it work?
Registration and duty
If you operate a public lottery or raffle, you’re required by law to register for lottery duty and draw up legal terms and conditions for the scheme. Unless you’re experienced in this field you will need to obtain expert advice which is likely to be expensive as it’s very specialised area. You’ll also be liable to pay lottery duty (12%) on the value of tickets sold which will eat into your income.
If you sell a property for more than you paid for it, the difference is charged to capital gains tax (CGT), unless an exemption applies, for example if the property has always been your home since you bought it. Where an exemption doesn’t apply the CGT rate is 20% or 28% depending the amount of gain plus other income you have. As the sale would be from a single winning ticket costing, say, £50, it might seem that there would be very little tax, but it’s not that simple.
Is it a gain or a profit?
HMRC would no doubt take the view, and we would agree with it, that operating a lottery for gain or profit constitutes a business even if it’s a one-off venture. Where you transfer personally owned assets to a business, tax rules treat it as if were a sale/purchase of trading stock at market value (MV), i.e. the price you could expect if you sold it to a third party.
Trap: You won’t avoid the CGT you were hoping to because you are deemed to have sold the property for what it’s really worth before the raffle takes place.
Assuming the value of ticket sales exceeded the MV of the property less costs, e.g. advertising the tickets and lottery duty, the excess is taxable profit on which you must pay income tax at up to 45% depending on how much other income you have. The good news is that if you can sell enough tickets to more than cover your costs plus the sum you were hoping to get for the property, you will be better off than you would be by selling the conventional way. However, there’s no tax advantage.
A lottery would be great news for the winning ticket holder. Not only have they got the bargain of a lifetime, but they wouldn’t have to pay stamp duty land tax (or the equivalent in Scotland and Wales) because the price for the ticket will be well below the level at which it kicks in. However, they might get lumbered with a higher than expected tax bill when they sell the property (unless they have occupied it as their home). This is because its cost for tax purposes would be the price of the ticket, and when they sell the property for more than that the difference is taxable. Overall they’ll still be a winner, but that’s no help to you.
For more information, we provide a Business Consultation to ensure our clients benefits from tax planning and accounting matters.
Companies999 are Chartered Certified Accountants and Birmingham’s Best Company Formation Agent.