Yesterday, the Chancellor, Rachel Reeves, announced in the Budget an important change to how inheritance tax (IHT) applies to compensation for those affected by the infected blood tragedy. This decision removes a major source of uncertainty that several members have been worried about and asking us about for some time.
What Was the Position Before?
Until now, compensation payments, including any interim payments made, were not automatically exempt from inheritance tax. This meant:
- Compensation was treated as part of a person’s estate when they died.
- If their estate exceeded the inheritance tax threshold, part of that compensation could have been taxed and at a higher rate.
Many in our community felt this was deeply unfair. These payments were meant to recognise the harm caused by systemic failures, and families were understandably concerned about losing part of that compensation to tax.
What Has Changed?
The Chancellor has now confirmed that infected blood compensation will be fully exempt from inheritance tax, regardless of the size of someone’s estate.
This now means:
- Compensation payments made under the Infected Blood Compensation Scheme and the Interim Compensation Payment Scheme are exempt from income tax, capital gains tax and inheritance tax.
- Instead of being ignored entirely for inheritance tax purposes, compensation generates an inheritance tax credit equal to the tax that would have been payable on the compensation amount. This credit is then set against any inheritance tax due on the person’s estate when they die.
- This inheritance tax credit will also apply where the original infected or affected person has died before the compensation is paid. The credit is automatically transferred to the first living beneficiary of their estate, ensuring that compensation inherited in these circumstances does not create an inheritance tax charge.
- These inheritance tax provisions apply to compensation payments made both before and after 26 November 2025.
- First living recipients of compensation payments will also have a two-year window in which they can gift some or all of their compensation without triggering inheritance tax. This applies to gifts made on or after 4 December 2025.
Although these changes take effect immediately, the UK Government has said legislation will be introduced next year to formally set the new rules in law.
What This Means for You
For many individuals and families, this announcement provides welcome clarity and removes a significant worry about future inheritance tax implications.
Haemophilia Scotland welcomes this decision to protect compensation from inheritance tax, especially as several of our members have raised concerns about this issue in recent months.
For more information, the Government updated the section titled “Impact on tax and benefits” in their compensation scheme explainer which can be found here.