Families hit by Britain's worst scandals face inheritance tax threat

Times

a day ago

Families of the victims of two of Britain's worst scandals face an inheritance tax sting on their compensation.
Ministers had promised that money paid to dead victims of the Post Office and infected blood scandals would be free from inheritance tax, capital gains tax and income tax.
But lawyers representing bereaved families have since discovered that this only applies to the first transfer of money from a victim's estate. If the money went to a victim's spouse or civil partner and they then passed it on to their children, that would be a second transfer and could be subject to inheritance tax at 40 per cent.
For the compensation to go to a child or someone other than a spouse inheritance tax-free, that recipient would have to be specified in the victim's will as the beneficiary of the first transfer — not something that is possible for the children of victims who have died.
It is estimated that 30,000 victims were given blood infected with HIV, hepatitis B or hepatitis C by the NHS between the 1970s and early 1990s. More than 3,000 people have died as a result. Thousands of sub-postmasters were wrongly accused of taking money from their tills between 1999 and 2015when a glitch in the Horizon accounting software was really to blame.
Some £13.6 billion was set aside for compensation to victims across both scandals.
Jade Gani from the Association of Lifetime Lawyers, a trade body for those who represent older and vulnerable people, said: 'It is a massive flaw in the system that families who have already lost so much could now have to pay back significant sums to the body ultimately responsible for the scandal.'
The infected blood scandal is widely considered to be the biggest treatment disaster in the history of the NHS. Thousands of patients were given contaminated blood after accidents, during childbirth or medical procedures.
Patients were also given treatments that contained infected blood. About 6,000 people who suffered from haemophilia, a condition that prevents the blood from clotting properly, and other bleeding disorders received treatments to replace missing clotting agents that were made from contaminated blood plasma.
In May 2024 the prime minister Rishi Sunak apologised for a 'decades-long moral failure' and promised to pay 'whatever it costs' to compensate victims.
More than £11.8 billion was set aside, which included money for infected victims and those affected by the scandal, such as partners and children. The government has paid £1.5 billion to victims since payments began in December.
Payments were said to be protected from inheritance tax, but it has now emerged that this only applied to the first transfer. This is not an issue for victims who get their compensation during their lifetime because they can change their will so that family members are mentioned as first transfer beneficiaries of the compensation and so won't have to pay tax on it.
• Infected blood judge angered by slow and 'unjust' compensation
But the payments to victims who have already died, which are due to begin later this year, will only be inheritance tax-free for the first-transfer beneficiary — usually a spouse or civil partner who can inherit their partner's estate inheritance tax-free anyway.
The first £325,000 value of an estate is free from inheritance tax (£500,000 if it is worth less than £2 million and includes a main home left to a direct descendant). Spouses or civil partners can inherit without paying inheritance tax, and they can also inherit each other's allowances, meaning a couple can pass on up to £1 million inheritance tax-free. With some blood scandal compensation payments set to hit £2 million and many in line to get about £1 million, it is likely that most victims' estates will breach the allowances. Anything left in an estate above the tax-free allowance can be taxed at 40 per cent.
The decades-long delays to compensation payments mean many surviving beneficiaries are now in their eighties and nineties, and will not have enough time to give away their money tax-free. Gifts fall out of your estate for inheritance tax purposes if you live for seven years after they are made. If you live for three to seven years then anything above your allowances is taxed on a sliding scale. Die before three years and it will remain part of your estate and may be taxed at the full 40 per cent inheritance tax rate.
It was reported on Wednesday that the chancellor was considering scrapping the seven-year rule or extending the seven years to ten or beyond.
Ben Bell from the Society of Trust and Estate Practitioners, a trade group for inheritance planners, said: 'This is a major injustice. Parliament made provision for the payments to be exempt from inheritance tax, but the delay in making the payments means that the government will, in many cases, get 40 per cent of the payments back in inheritance tax.'
Owen McLaughlin's father, Steve, was born with haemophilia and died in 1989 aged 34 after being given blood plasma infected with HIV.
'My father has never met my wife, he never met my kids. All the important events in my life, he wasn't there,' said Owen, 55, from Exeter.
Steve left everything to his wife, Pam, who is now 80 and suffering from a number of health conditions, including multiple sclerosis. She expects to get more than £500,000 in compensation and wants to pass it on to her two sons and six grandchildren, but will then need to survive at least seven years if they are to fully escape inheritance tax.
'It is unfair because if my dad had known there would be this future compensation and the tax rules would be as they are, he would have written his will differently,' Owen said. 'It is completely immoral that the government can pay compensation for a frankly heinous act and then think about immediately taking it back through inheritance tax.'
Chris Wood's father, John, was infected with HIV in 1982 after being given blood during a triple heart bypass operation to treat his angina.
He lived with the disease for years without knowing, before getting seriously ill during the Christmas of 1992 and being admitted to hospital. He died three weeks later, devastating Chris and his two sisters.
Chris's, mother Rita, who is 91, will inherit John's compensation and wants to give it to her children straight away but with her estate worth more than her IHT-free allowances the family face having to pay back £360,000 if she dies within three years.
'I understand it has to stop somewhere, but the exemption should carry through to immediate family,' said Chris, 53, from Chelmsford in Essex. 'We could have to pay back 40 per cent of what we get within a year or two — it's a kick in the teeth after all we have been through.'
About 700 sub-postmasters were convicted of offences including fraud, false accounting and theft based on incorrect information provided by the Horizon accounting system. Some went to prison and thousands more were wrongly accused. With the earliest cases now 26 years ago and compensation still being paid, the victims are facing similar inheritance tax worries.
Stephen Lewis from the law firm Schofield and Sweeney, which represents 50 sub-postmasters, said that while there would be fewer families affected than with the infected blood scandal, inheritance tax was an issue.
'I anticipate there will be a sizeable element that this could affect just by the fact that we are dealing with compensation for events from up to 25 years ago,' he said.
A third of the 10,814 Post Office victims are still waiting for compensation, and at least 345 died before being compensated.
Neil Hudgell from the law firm Hudgell Solicitors, which represents 1,000 sub-postmasters, said: 'Compensation ought to be treated holistically as to the close family unit, and there shouldn't be any tax payable on the first or second transfers after compensation is paid.'
The Association of Lifetime Lawyers and Society of Trust and Estate Practitioners has written to HM Revenue & Customs about the issue in a push for change.
A beneficiary of a will has the option to redirect money to new beneficiaries if they choose through a deed of variation. If done within two years of death, the change will be treated as if the deceased included them in the original will, meaning that compensation could be exempt from inheritance tax.
This, however, is not an option for the beneficiaries of many infected blood victims, who died more than two years ago.
The Association wants the two-year limit to begin on payment of compensation, rather than death, which would give the initial beneficiary time to ensure that family members benefit from the tax exemption.
Gani said: 'Many victims have paid the ultimate price with their lives and now, unless the law changes, their families are forced to pay again; this time to the taxman.'
The government said: 'While no amount of compensation will make up for the suffering people have endured, we are committed to delivering compensation as swiftly as possible.
'Victims' compensation is exempt from inheritance tax when applied to the estate of the person to whom the compensation payment was made, and this relief will not extend to subsequent beneficiaries of the deceased person's estate.'