Between the 1970s and early 1990s, more than 30,000 NHS patients were infected with HIV or hepatitis C through contaminated blood products.
Over 3,000 people have since died, and thousands more continue to live with serious health conditions. A public inquiry began in 2017 and, in 2025, the government introduced regulations to implement a compensation scheme now valued at £11.8bn.
Compensation payments are now reaching those infected or affected, and advisers are seeing a clear rise in demand for support. These are often life-changing sums and carry a strong emotional weight.
As an adviser, it’s vital that you can provide accurate guidance, so understanding the tax and planning implications is essential.
Tax considerations for those infected or affected
Legislation ensures that receiving a compensation payment does not create an income tax or capital gains tax charge. Once invested, however, any income or gains are taxable in the normal way.
Similarly, compensation is exempt from inheritance tax. Relief is given as a tax credit equal to the inheritance tax that would otherwise be due on the compensation amount. This offers meaningful protection, but it does not remove the compensation entirely from the estate for inheritance-tax purposes.
If the infected or affected person dies before compensation is paid, the payment goes instead to another individual
Compensation payments are also disregarded when assessing entitlement to means-tested benefits for the infected or affected individual.
For example, Gavin receives £100,000 compensation, which he invests for income. When he dies in the 2030/31 tax year, his estate is valued at £650,000, and he is entitled to a combined £500,000 in nil-rate bands.
This leaves £150,000 taxable at 40%, creating a liability of £60,000. Because Gavin’s estate is entitled to a £40,000 tax credit (40% of the £100,000 compensation), the final inheritance tax liability reduces to £20,000.
New inheritance tax rules for the ‘first living recipient’
If the infected or affected person dies before compensation is paid, the payment goes instead to another individual — often a family member. These individuals are referred to as the first living recipient. Changes announced in November 2025 introduced two important provisions:
Tax credit now applies to the first living recipient
Previously, the inheritance tax credit applied only to the estate of the infected or affected person. The credit now also applies to the estate of the first living recipient, providing relief to families who might otherwise face a significant inheritance tax charge.
Tom Archer: Planning around a frozen nil-rate band
Gifting is tax free within the permitted period
A first living recipient may give away part or all of the compensation without creating an inheritance tax charge. The gifted amount is treated as though it never formed part of the recipient’s estate, so the usual seven-year rule does not apply. The inheritance tax credit also transfers to the recipient of the gift.
Gifts must be made within two years of receiving the compensation. Where the compensation was received before 4 December 2025, the two-year period runs from that date.
Creating an advice plan to support your clients
Advising recipients of compensation can feel complex. The sums involved are often large, the tax rules are detailed and the emotional context matters.
Although the compensation is tax-free, any subsequent income or capital growth is not. Advisers should consider tax-efficient wrappers such as Isas, available allowances within general investment accounts and the tax-deferral benefits of investment bonds.
The compensation provides vital support for additional costs arising from ongoing impact of the infected blood
The inheritance tax credit helps, but estates that already exceed the available nil-rate bands, or that will do so when pension death benefits begin to fall within scope in 2027, still require careful planning. Trusts and other estate planning tools remain relevant.
For many recipients, the compensation provides vital support for additional costs arising from ongoing impact of the infected blood or simply to meet retirement needs. Understanding likely access requirements helps determine investment risk, the choice of wrapper and whether inheritance tax planning is appropriate.
Many won’t need a complex solution; they just need the right one.
Tom Archer is a tax and trusts specialist at Quilter