In the Budget 2025 announcement, Chancellor Rachel Reeves confirmed that all payments made under the Infected Blood compensation arrangements will be exempt from Inheritance Tax (IHT), including circumstances where compensation is paid after the infected (or affected) person has died and is therefore received by someone else.
This is a significant development for families who waited a long time for justice and financial redress.
The Infected Blood Scandal
The Infected Blood Scandal is widely recognised as one of the UK’s gravest healthcare failures. From the 1970s onwards, thousands of people were infected with HIV and hepatitis (including hepatitis C) after receiving contaminated blood transfusions and blood products, often through NHS treatment.
The Infected Blood Inquiry estimated that more than 3,000 deaths are attributable to infected blood, blood products and tissue.
Alongside those infected, many more people have been harmed as “affected” individuals, partners, children, parents and carers who have lived with the personal, emotional and financial consequences for decades.
The IHT problem the policy is trying to fix
Before the latest announcement, the IHT position created a particularly unfair outcome for some families:
- Compensation payments were generally relieved from IHT when paid to (or on the death of) the infected or affected person eligible for compensation.
- However, where that eligible person had already died before compensation was paid, the payment might be made to another recipient. Under the previous rules, IHT relief did not necessarily continue when that “first living recipient” later died meaning the compensation could be exposed to IHT in their estate.
It’s this “secondary” exposure to IHT that the updated policy is designed to address.
What the government’s policy paper says
HMRC’s policy paper (published 26 November 2025) explains that the measure extends the existing IHT relief for payments made under the relevant infected blood compensation arrangements so that:
- Where the eligible infected or affected person has already died at the time of payment, the first living recipient will receive an IHT credit. This is intended to ensure the value of the compensation can pass on without an IHT charge on the first living recipient’s death.
- The first living recipient will also have two years to pass on some or all of the compensation without IHT becoming due, using a mechanism described as qualifying gifts and an equivalent IHT credit can follow the gifted amount.
Key dates (as currently stated)
- The IHT credit element is operative from 26 November 2025, with retrospective effect for relevant payments made before that date.
- The “qualifying gifts” changes apply to gifts made on or after 4 December 2025. Where compensation was paid before 4 December 2025, it is treated (for these purposes) as though paid on 4 December 2025, to start the two-year window.
Guidance from the Association of Lifetime Lawyers and The Society for Trust and Estate Practitioners (STEP)
The Association of Lifetime Lawyers and STEP have now published practical guidance, noting the changes are due to be implemented in the Finance (No. 2) Bill 2025/2026 and that some information across sources may appear contradictory while details are finalised.
Their guidance includes several practical points that may help those affected including:
- Reporting: the compensation payment and any transfer of IHT credit should be recorded on the IHT400, but HMRC has not yet confirmed exactly where so a separate schedule and/or detailed cover letter may be sensible.
- Qualifying gifts must be documented in writing: The guidance notes this may apply retroactively where gifts have already been made from compensation funds.
- Two-year window: for compensation received on or after 4 December 2025, the two-year period runs from receipt; for compensation received before that date, recipients may have two years from 4 December 2025 to make qualifying gifts.
- Trusts: where compensation is settled into a relevant property trust, there may be no entry charge, but the usual ten-year and exit charges can apply thereafter.
More detail is still needed
While the policy direction is clear, important implementation points remain “live”, and further clarification is expected as the legislation progresses and HMRC practice develops. The Lifetime Lawyers/STEP guidance highlights areas not yet directly addressed, including:
- how compensation payments and IHT credits will be recorded for HMRC purposes;
- the precise formalities for qualifying gifts;
- when the two-year period begins in specific scenarios;
- how certain trusts holding compensation funds will be treated.
In short: families may now have reassurance about the intended outcome. Compensation should not be eroded by IHT simply due to timing, but the practical steps and evidence required will matter, particularly for estates and larger families where funds may be passed on.
How DTM Legal can help
If you (or your family) are due to receive infected blood compensation, or you have received interim payments and are concerned about IHT, it may be sensible to take advice before making gifts, settling funds into trust, or finalising estate administration.
DTM Legal’s team can support with Inheritance Tax and Succession Planning, including:
- advising on IHT exposure and how the new “IHT credit” may apply in your circumstances;
- planning and documenting any intended gifts (including “qualifying gifts”);
- trust advice where compensation is being protected for children or other beneficiaries;
- estate administration support and IHT reporting.
To discuss your situation, please contact Heather Lally, Partner in our Trusts and Estates team, by calling 01244 354 822 or via email at heather.lally@dtmlegal.com.
This article is for general information only and does not constitute legal or tax advice.
