The Lemon Fool

Both my children have owned some premium bonds for several years. As they were under 16 at the time of purchase the occasional prize is deposited in my bank account and then I split and return the prizes to them at Christmas each year.
One is now over 16 and the other will be in the next few months. NS&I requires them to give their own bank account details when they reach 16.
They both agree that while they are dependents that they'd like to carry on sharing the prizes (FOMO on the share of £1M is clearly greater than giving up half of the occasional £25! )
What is the tax situation for this scenario? The winner can clearly give away half of their tax-free prize, but would the recipient get landed with a tax bill? Is there any way to mitigate this? This question is clearly aimed at the big prizes of £1M or £100k.

There's no tax on gifts. There's a potential implication for inheritance tax should the donor pass away within 7 years. Hopefully this wouldn't be an issue.

Scott.

Tri2000 wrote:Both my children have owned some premium bonds for several years. As they were under 16 at the time of purchase the occasional prize is deposited in my bank account and then I split and return the prizes to them at Christmas each year.
One is now over 16 and the other will be in the next few months. NS&I requires them to give their own bank account details when they reach 16.
They both agree that while they are dependents that they'd like to carry on sharing the prizes (FOMO on the share of £1M is clearly greater than giving up half of the occasional £25! )
What is the tax situation for this scenario? The winner can clearly give away half of their tax-free prize, but would the recipient get landed with a tax bill? Is there any way to mitigate this? This question is clearly aimed at the big prizes of £1M or £100k.

If you are aiming the question at a large win, perhaps you should ask them if they want you having £1m of theirs in your bank account, or you should ask yourself how you would feel if they had £500k each in their bank account. People fall out for a lot less than £1m.

NB: Gifts are taxed, it's just that there are certain exemptions, such as the annual £3k allowance, or the 7 year rule (PET: potentially _exempt_ transfer).
See https://www.gov.uk/inheritance-tax/gifts
IANAL

yorkshirelad1 wrote: Gifts are taxed, it's just that there are certain exemptions, such as the annual £3k allowance, or the 7 year rule (PET: potentially _exempt_ transfer).

I am not aware of any circumstance where gifts are taxed at the time the gift is made. Nor do gifts have to be reported at the time of the gift, nor in that tax year. Nor is there anything called a gift tax.

There may in some cases be a risk that the value of that gift will be added back into the value of your estate for IHT purposes if, for instance, you fail to live 7 more years or else you reserve benefit from that gift. But that is it. And then it would be your estate paying the tax, and not the gift donor or donee.

A gift (or bequest) from a foreigner is completely free of the possibility of any kind of UK tax.

In fact a gift is unique in that it is almost the only case of money or value changing hands and not being taxed or reportable. Any other transfer potentially involves income tax, VAT, CGT and so on.

Tri2000 wrote:... Is there any way to mitigate this? This question is clearly aimed at the big prizes of £1M or £100k.

I'm aware that for Lottery Syndicates, it is advisable to enter into a formal legally sound agreement to share the 'wins' amongst the participants. this article in Taxation https://www.taxation.co.uk/articles/tax-planning-for-lottery-winners commences along those lines and may also talk of Premium Bond prizes but I'm not a subscriber so cannot comment either way.

In the situation you describe,. the Premium Bond prizes to be paid into a personal bank account of the respective winner (as the Bonds must be held individually & not jointly), I don't feel this could be treated as a syndicate but would be interested to learn if others think differently. If that's the case, I don't believe the source of the enlarged bank account balance is relevant. It is the subsequent cash gift that is relevant; the treatment of which has been outlined in earlier replies.

Btw, your question may better suit Taxes or Legal Issues. Feel free to report your own post and ask for it to be moved to a more relevant Forum.

Having written the above, see and study:

Statement of Practice E14 Published 16 September 1977
https://www.gov.uk/government/publications/statement-of-practice-e14/statement-of-practice-e14

I'm assuming that SoP is still valid but haven't checked.

The last sentence states The same principles apply to premium bonds syndicates and other similar arrangements. It may therefore be possible for one of your issue to hold the Premium Bonds personally (assuming the limits are not exceeded) and, assuming an enforceable agreement**** is in existence, one could then distribute a proportion of the "Prize" to the other, seemingly without IHT consequences.

Whether or not your children would be happy with such an arrangement is another matter. If it were me, I'd strongly suggest they cut their ties now without comeback.

*** I haven't looked into the fact that, both being under 18, they may therefore not be in a position to enter into such an enforceable contract.

IANAL & E&OE!

Is it not easier and fairer just to transfer the bonds into their names?

Dod

Dod101 wrote:Is it not easier and fairer just to transfer the bonds into their names?

Dod

That's not the concern though is it?

How do they (potentially) share the winnings, and are there any tax considerations, is the OP's question.

dealtn wrote:

Dod101 wrote:Is it not easier and fairer just to transfer the bonds into their names?

Dod

That's not the concern though is it?

How do they (potentially) share the winnings, and are there any tax considerations, is the OP's question.

These questions appear to have been answered which is why I made my suggestion. And as someone said earlier, it will be a concern if they win £1 million.

Dod

Dod101 wrote:

dealtn wrote:

Dod101 wrote:Is it not easier and fairer just to transfer the bonds into their names?

Dod

That's not the concern though is it?

How do they (potentially) share the winnings, and are there any tax considerations, is the OP's question.

These questions appear to have been answered which is why I made my suggestion. And as someone said earlier, it will be a concern if they win £1 million.

Dod

How does having the bonds in their own name remove that concern if one of them wins a £1m, and the other doesn't? The "ownership" is irrelevant surely? It's the agreement to share it that removes that concern.

It would be best to determine who is making the transfer.

It is NOT gifts that are free of IHT but rather potentially exempt transfers, which (IHTA 1984 s 3A (1B) (2)(a)) is a transfer of value the value of which becomes comprised in the estate of the other individual. So the question that would have to be answered is WHO is making the transfer if there is no written agreement as to the realities of the situation. That question would be important if the WHO died within 7 years of the transfer and the transfer became chargeable.

I would recommend a signed agreement.

Eb.

A sharp lawyer might argue that if they make a written agreement that each is entitled to 50% of the prizes won on the other's holdings, the transfer of value has taken place at the point of signing that agreement, not on the subsequent win by a premium bond. So they would only have to live for 7 years from the date of the agreement. A win 8 years down the line being shared is not a potentially exempt transfer?

scrumpyjack wrote:A sharp lawyer might argue that if they make a written agreement that each is entitled to 50% of the prizes won on the other's holdings, the transfer of value has taken place at the point of signing that agreement, not on the subsequent win by a premium bond. So they would only have to live for 7 years from the date of the agreement. A win 8 years down the line being shared is not a potentially exempt transfer?

Assuming they have the same number of bonds, the agreement to share diminishes neither's estate at the point it is made, so is a nothing for IHT. The agreement having been made, there is no diminution at the point of a win, so again it is a nothing for IHT.