Impact of 2025 Budget on compensation payments – webinar recording and summary

Written by Jessica Bomford, December 17, 2025

EDIT 29.1.26: Please note that further details have emerged since this webinar was recorded. Once this is clarified we will publish an updated web story.

On 9 December, we held a webinar to discuss how changes announced in this year’s Budget might affect financial decisions you need to make about compensation payments.  The webinar can be viewed below.

We were joined by Sam Richards, Chartered Financial Planner and Founder of Factor Financial Planning, to give us his assessment of the changes and answer your questions. 

Sam explained that until November 2025, some people who were the first recipients of a compensation payment were liable for Inheritance Tax (IHT), even though all compensation payments are supposed to be exempt from IHT. Changes made in the Budget meant that this is now not the case. The changes mainly impact people making claims on behalf of estates. Sam also gave advice which was relevant to everyone about updating wills and, in some cases, Power of Attorneys.

Here’s a summary of the webinar:

New inheritance tax rules

The post‑budget reforms focus on the first living person (or people) who actually receive the compensation rather than the first legal transfer between estates. Whatever route the compensation has taken through earlier estates, the first living recipients now inherit the special IHT relief attached to the compensation.​

Those first living recipients also gain protection against means‑testing for benefits and care fees, provided the funds can be identified and traced as compensation. Compensation itself remains free of income tax and capital gains tax when paid, but any subsequent interest, rent or investment gains are taxable in the normal way and may require self‑assessment.​

Making a will

For living infected and affected people, the general IHT framework (nil‑rate bands, residence nil‑rate band, spousal and charity exemptions, seven‑year gift rule) has not changed. However, planning around wills needs to take account of the fact that the special compensation‑linked IHT relief does not pass between spouses or civil partners as ordinary allowances do.​

Because of this, standard ‘mirror wills’ that leave everything to the surviving partner on first death and then to children on second death can inadvertently expose the compensation to IHT when it finally passes to the next generation. Sam advises people to review their wills with lawyers who understand the infected blood compensation rules, and to consider structures such as will trusts or directing some or all of the compensation straight to children or other intended beneficiaries, so it does not have to pass through a spouse’s estate.​

Avoid keeping compensation in joint accounts

He also warns against routinely placing compensation into joint accounts or transferring it to a partner during lifetime if it is not necessary. Doing so can bring that money fully into the partner’s estate for IHT purposes and may undermine benefit protections, because the partner’s assets are then treated as higher for means‑testing.​

Two- year gifts explained

A major change is the introduction of a special two‑year gifting window for the first living recipient of compensation. That person has two years from the date they receive the compensation (or, for payments made before 4 December 2025, two years from 4 December 2025) to make ‘qualifying gifts’ of some or all of the compensated amount.​

Qualifying gifts pass on the full IHT relief and protection from means‑testing to the person receiving the gift, without requiring the donor to survive seven years as under the usual potentially exempt transfer rules. To qualify, each gift must be clearly recorded in writing and signed by the donor. While we wait for more information about how to log these gifts, Sam suggests keeping as much detail as possible and has designed this form to record the information. It would be a good idea to keep these records with the will so executors and advisers can apply the IHT relief correctly in the future.​

Update financial Power of Attorney

Sam notes that for older relatives expecting to receive compensation from an estate, it could be important to have updated Power of Attorney that explicitly allows the attorney to make such gifts, so that the two‑year window can still be used even if the person loses capacity. A standard Power of Attorney will not allow the attorney to gift away money.  As the person’s compensation is already protected from both IHT and care cost means‑testing, arranging these gifts is not depriving the estate of taxable or assessable assets. ​Sam explained that this is a more complex Power of Attorney than most people are likely to hold and would need to be facilitated by a solicitor.

Free financial guidance service for IBCA claimants

Sam explained that he had been involved in helping to shape the Infected Blood Compensation Authority’s (IBCA) funded financial guidance service, which is available free to people as soon as their compensation claim begins. It is also possible to access the service after your claim has been awarded, which can be requested through your claim manager. Sam said the service is designed to give people impartial, one‑to‑one help before they make decisions about their compensation. It is  structured guidance that explains compensation options such as lump sums versus ongoing support payments, tax and benefits implications, and practical planning points so that individuals can then decide what to do, and, if they wish, seek separate regulated financial advice. Sessions are delivered by advisers who have been specifically trained on the infected blood compensation rules. If a claimant already has their own financial adviser, they are welcome to include their financial adviser in the free financial guidance to ensure they fully understand the scheme’s technical features.​

Questions asked during the webinar:

If someone has already gifted an interim estate payment, is it inheritance tax free?

Sam explains that earlier interim payments paid directly to individuals are treated as that person’s own compensation and carry their own IHT relief. If a recipient gifted some of the compensation money in 2024, the usual seven‑year gift rules technically apply, but any IHT that might arise on that gift would be covered by the IHT credit attached to the compensation.​

How do interim payments to estates work for IHT?

Interim payments made to estates fall under the new rules. This means that the first living recipients of the compensation benefit from IHT protection and have an IHT credit when gifting the money. As described above, the two-year window for gifting compensation payments begins on the date compensation is paid. If the payment has already been made, the start date is taken to be 4 December 2025.

Could previous non‑compensation money in an estate now face extra Inheritance Tax?

A question was raised about whether existing estate assets (for example, funds already present when someone died in 2016) could face extra IHT when large compensation later enters the estate. Sam confirms that any IHT due on the original estate is fixed by the rules at the time of death, so subsequent compensation payments do not retrospectively increase tax on those pre‑existing assets.​

Does compensation used to buy assets (like art or property) need to be tracked for IHT?

For IHT purposes, the relief is tied to the amount of compensation originally received, not to the form it later takes or how its value fluctuates. Even if compensation is used to buy investments, property or other assets, the original IHT credit can still be applied against the estate, although good records help to show what portion of the estate is derived from compensation.​ However, any interest, rental income or capital gains generated by investing or holding that money are taxable in the normal way.

How do people arrange a financial guidance session?

Sam explains that funded financial guidance sessions become available through the Infected Blood Compensation Authority (IBCA) when someone receives a compensation offer and can be arranged through the claim manager administering the claim. Even if the money has already been paid (for example, up to a year earlier), people can still request a session, either by asking the claim manager by emailing Sam so he can prompt the claim manager to set it up.​ Sam had earlier explained that he had used his expertise to help shape the IBCA financial guidance service and was part of Lincoln Consultants, one of the firms which provides this service.

Can people reclaim IHT already paid on compensation?

One webinar attendee had already paid IHT on a six‑figure amount linked to compensation and asked if it could be reclaimed under the new rules. Sam’s answer was that in principle it should be reclaimable, as the new relief is designed to prevent that tax, but the reclaim would have to go through the tax authorities’ process, and he offered to help connect people with appropriate contacts.

Is interest on compensation, or income from assets bought with it, tax free?

Sam clarifies that the compensation itself is exempt from income tax, capital gains tax and IHT when paid. However, any interest, rental income or capital gains generated by investing or holding that money are taxable in the normal way, and individuals might need accountancy help or self‑assessment returns if these amounts exceed personal allowances.​

How does compensation affect means‑tested benefits?

For means‑tested benefits and care‑cost assessments, Sam explains that compensation and income directly derived from it can be disregarded if they can be clearly traced back to the compensation. He recommends ring‑fencing compensation in separate accounts, keeping detailed records, and avoiding unnecessary transfers into a partner’s sole or joint accounts that might blur the origin of the funds.

How is IHT relief actually claimed when someone dies?

Executors will need to claim the special IHT relief using normal inheritance tax forms, so they must know that compensation was received and the amounts involved. Sam suggests keeping copies of compensation offer letters, payment records and any qualifying gift documentation alongside the will to make it easier for executors and solicitors to apply the correct relief.​

Is compensation for ‘affected’ people also exempt from inheritance tax?

Sam confirms that compensation paid to affected people, such as bereaved partners, parents or siblings is treated the same way as infected people for IHT purposes. The IHT credit is based on the amount of compensation received and can be set against their estate at death, subject to the same rules on first living recipients, wills, and the two‑year gifting window.​

If you have any specific questions for Sam, you can reach out to him on [email protected]