Editor’s note: This article was first published in December 2017; it describes Spanish tax rules as of late 2017. The exemption for state lottery prizes was then €2,500 and has since risen, so the statement that prizes over €2,500 have 20% withheld is out of date.
It’s a very common conversation: someone tells you they’ve bought a ticket for a chance to win a huge Christmas hamper with cars, motorbikes, trips and so on, worth €300,000 or even €1 million.
I don’t know what the situation is in other countries or what you have to declare to the tax authorities there, but at least in Spain, if most people knew what can happen to you if you win a prize like that, they simply wouldn’t buy shares in Christmas hamper raffles unless they had the cash to deal with what comes next.
When you win a Christmas hamper, you haven’t won a prize. More likely, you’ve won a misfortune.
How do these hampers work? How much do you have to pay the tax authorities on a prize like this? And why should you turn the prize down in most cases unless you have cash available?
Let’s look at these questions.
How does the Spanish tax agency see these Christmas hampers?
Hacienda (the Spanish tax agency) doesn’t care about cars, motorbikes or hams. All it sees is that you’ve received a prize worth €300,000 or €600,000. And, obviously, it wants its share. But you can’t pay it with a car. Hacienda counts the prize in money, and it wants its share paid in money, even if you don’t have that money. You can always sell items from the hamper, of course, but you won’t get the price Hacienda values them at.
That’s when you get stories like that of one winner of a hamper worth more than €300,000, who put all his assets at risk by accepting the prize.
Hacienda is claiming €142,000 from him on that prize (46% of the hamper’s value). He has to pay it in two instalments, and €28,000 in interest has already been added for deferring the payment and for paying the first instalment late.
If he can’t make that payment, Hacienda will seize his assets. In other words, accepting that prize has put everything he owns at risk.
See also: What to do if you win a million-euro lottery prize: steps to follow
A prize that’s tainted from the start
Hacienda charges tax based on the value of the items received. The most logical way to pay that tax (if we don’t have cash) is to sell the most expensive items in the hamper, such as the cars. The problem is that the car dealer won’t pay you the car’s real value (that is, the value Hacienda gives the vehicle and on which it charges you tax). In the winner’s case, the dealer would knock 20% off the value of the vehicle.
Put more simply, Hacienda values the items at their real price and demands tax on that value. If you sell items to pay Hacienda, in the eyes of whoever buys them, they’re already second-hand.
You started losing money the very moment you won the hamper. Well, actually, the very moment you bought the ticket.
The difference between cash prizes and Christmas hampers
In both cases you’ll pay tax, but when it’s a cash prize, the situation is much simpler and more intuitive.
Prizes over €2,500 have 20% withheld, which, luckily for the winner, is deducted immediately when the prize is paid out. In other words, if you win €100,000 in the lottery, you’ll receive €80,000.
The problem comes when you receive items that are valued in money. These items or bundles of products are taxed in two stages: 21% when you receive the prize, and then you have to include it in your income tax return.
Because IRPF (Spanish personal income tax) is progressive, the higher the value of the prize, the higher the tax rates.
In most cases, winners of big product bundles or those gigantic Christmas hampers with boats, cars, motorbikes and trips, if they’re middle class or poor, are forced to turn the prize down because they can’t meet their tax obligations.
There’s a lot of ignorance about this. People rush to buy raffle tickets for hampers, drawn by the luxury items or by the hamper’s value, without knowing that in the following year’s income tax return they’ll have to include every increase in their wealth and pay the corresponding tax as if they had bought the item. And that comes on top of the other 21% they had to pay as soon as they received the prize.
So, in short, if you don’t have cash available, a Christmas hamper like this is very probably not for you.
Featured image: Phil Guest, CC BY-SA 2.0, via Flickr.
