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Infected blood compensation scheme places unfair inheritance tax burden on secondary transfers

AuthorsHelen Dawson

3 min read

Estate Planning, Brabners Personal

A healthcare professional in pink scrubs and pink gloves is inserting a needle into a patient's arm during a medical procedure, with the patient's arm taped and prepared.

Some claimants under the Infected Blood Compensation Scheme have waited as long as 50 years to be recompensed, which may have left them in an unfair inheritance tax (IHT) planning situation.

The Society of Trust and Estate Practitioners (STEP) and the Association of Lifetime Lawyers are currently working with HMRC to seek to address these inequalities. Here, their member and our own private client solicitor, Helen Dawson, explains what’s happened and why those affected should seek urgent legal advice.

 

Infected blood compensation & inheritance tax explained

Compensation payments made by the Infected Blood Compensation Authority are exempt from income tax, capital gains tax and IHT (as per schedule 15 of the Finance Act 2020). Payments received can be gifted either in lifetime or on death free of IHT. 

However, it has taken over 50 years for the issue to be officially recognised, liability admitted and compensation payments administered. For many families, the compensation being paid out now is due to harm that was caused decades ago. In a significant number of cases, those affected have died (or will die) before receiving their compensation.

This is a critical distinction for inheritance tax planning because if someone receives compensation during their lifetime, they can give part of it away during their lifetime with no IHT consequences — and any compensation that they still hold at death will pass to their beneficiaries tax free. Additionally, if an estate receives compensation on behalf of someone who has died, that estate can be varied within two years of death to make the most of the IHT exemption.

However, if the estate receives the compensation more than two years after death, it can’t be varied in the same way.

 

The secondary transfer conundrum

This will often mean that the compensation will pass to someone else — such as a spouse — and be subject to IHT when the spouse gifts that on either during their lifetime or upon death. This scenario is referred to as a ‘secondary transfer’.

In any event, a spouse receiving the compensation would inherit from the deceased free of tax. However, given the choice, the deceased may well have chosen to redirect the payment to their children for them to receive the funds tax free. If the children receive the funds via the spouse (as a secondary transfer), the funds will be subject to IHT when they’re inherited from the spouse’s estate. 

This means that an unfair situation has been created where some families have IHT planning opportunities open to them that others don’t — something that’s primarily due to the significant length of time that it has taken for their situation to be recognised and compensated for. 

 

Have you received compensation?

Families who’ve suffered and waited decades for recognition and compensation are most vulnerable to receiving this unfair treatment as a result of their loved one dying before a compensation payout. 

If you or your family have received — or are due to receive — a compensation payment made under the scheme, we recommend that you speak to your trusted advisors immediately and review your Will to ensure that you’re able to make the most of the planning opportunities available to you.

 

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Our award-winning private client solicitors have expertise in Wills, trusts, probate, succession and estate planning for business owners, families and high-net-worth individuals.

If you need advice, talk to us today by calling 0333 004 4488, sending us an email at privateclient@brabners.com or completing our contact form below.

Helen Dawson

Helen is a Senior Associate in our private client team.

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