While the Autumn Budget brought tax rises and gloom for some, it delivered relief and comfort to the victims and families of the Infected Blood Scandal, as the Chancellor Rachel Reeves announced that she would “exempt all payments from the Infected Blood scheme from inheritance tax (‘IHT’) regardless of the circumstances in which those payments are passed down”. This decision finally resolves a longstanding technical ‘secondary transfer’ flaw that had created a secondary injustice for affected families. The changes ensure that compensation awarded for a public failure will no longer be diminished by unfair taxation.
What was the Infected Blood Scandal?
The Infected Blood Scandal was a major public health disaster which occurred in the UK during the 1970s–1990s, in which thousands of people, including children, were given blood that was contaminated with HIV and Hepatitis C. Around 30,000 were infected as a result and more than 3,000 have since died from AIDS-related illnesses or liver failure.
A statutory public inquiry began in 2018, with a final report published in 2024. The report concluded that “the disaster was not an accident” but rather the result of systemic failures and negligence. The inquiry recommended comprehensive compensation be provided both to victims and their families, with payments covering physical injury, psychological harm, stigma, loss of earnings and family impact.
The government set aside £11.8 billion for compensation. Interim payments were issued to many survivors and families in 2022, and the official Infected Blood Compensation Schemes came into force on 23 August 2024.
What is the usual IHT treatment of estates and lifetime gifts?
The usual IHT rate is 40%. This tax applies on death to an individual’s estate exceeding the nil-rate band (‘NRB’ currently £325,000 less any gifts made in the seven years preceding death), subject to available exemptions and reliefs.
Lifetime gifts made to an individual can also be subject to IHT. Gifts made to an individual directly, rather than into a trust, are considered potentially exempt transfers ‘(PETs’). This means that they are immediately tax free but, if the donor dies within 7 years of making the gift, any value of the gift above the NRB becomes chargeable at 40%.
How were Infected Blood compensations treated before the Budget?
Prior to the Budget, if an infected or affected person had already died at the time compensation was paid, this payment could instead be made to a living recipient (for example, the infected person’s spouse) free from IHT. Issues arose, however, when that recipient later passed away, as they were not entitled to the same IHT relief. This technical flaw, known as the ‘secondary transfer’ issue, meant that compensation was treated as part of the recipient’s estate and taxed on death. The result was harsh, as compensation payments intended to remedy injustice were instead significantly reduced by taxation when passed on to surviving relatives.
What is the new IHT position for Infected Blood compensation payments?
The Autumn Budget reforms ensure that compensation payments will benefit from IHT relief even when the original infected or affected person had already died before payment was made. In these cases, the first living recipient(s) will be given an IHT ‘credit’, meaning that when they die, the value of compensation they received will not incur IHT. Similarly, the recipient(s) have a two-year window in which to gift some or all of the compensation to others without it being treated as a PET and triggering an IHT charge if they die within 7 years of making the gift. The changes introduce fairness and flexibility for the families of deceased victims, allowing them to benefit fully from the compensation without facing heavy tax bills.
Where does the line stop with IHT exemption for compensation awards?
While this announcement is a win for the victims of the Infected Blood Scandal, it leaves questions about the IHT treatment of other compensation awards. For example, will a similar tax credit apply to compensation under the Horizon Post Office Scandal, given that many sub-postmasters died before their claims were finalised? Would it apply to compensation received from the Windrush Scandal? There is currently no clear guidance that suggests the first living recipient(s) in these cases will benefit from an IHT ‘credit’, putting them at risk of the ‘secondary transfer’ issue.
Additionally, no IHT reliefs are currently available for clinical negligence or personal injury compensation payments, with these damages included in a victim’s estate for IHT purposes on their death. Why should individual cases of negligence be treated differently to larger institutional cases of negligence?
Overall, the announcement in the Autumn Budget regarding IHT and the Infected Blood Scandal Payments is positive, demonstrating that the government is willing to address secondary injustices and to ensure compensatory payments are fair and just. However, perhaps there is room for further reform, widening the application of IHT credits to include other compensation schemes and awards.
