Inheritance tax rules on Industrial Disease Compensation awards

JoSoap02

Wondering if anyone can answer this please.  My sister in law's partner received a compensation payout for Mesothelioma, a form of asbestosis in 2023.  He died in December 2024. They were not married or in a Civil partnership.  She inherits everything in his will therefore the estate is liable for Inheritance Tax.
This payment wasn't taxable but now forms the bulk of his savings and takes the estate above the current threshold and is therefore taxable.  So should his compensation payment be taxable in death when it wasn't in life  ?

Keep_pedalling

With no spousal exemption available I am afraid anything over his NRB, regardless of where it originated, will be subject to IHT.

Savvy_Sue

It's possibly worth consulting the union / employer behind the claim, but as I see it: 

• The payment was not taxable in life, because it was made to - let's call him Fred.
• Fred could have done anything he liked with the money - given it away, bought a new car, improved or adapted his house, gone on a world cruise. If he had given it away or spent it, it would not be taxable on death, because it would no longer be there to tax.
• However, Fred didn't spend all of the money, and it is no longer his money, it forms part of his estate (as would a car, and as would the increased value of his house). 
• And it is the total value of Fred's estate which HMRC are considering rather than the source of his assets. 

And just checking: was it just the initial payment which was made free of tax? And was Fred then liable to pay tax if the interest on his savings was more than (generally) £1k? If that's the case, then it seems to indicate that there's nothing special about that money, apart from that initially there was no tax to pay on it. 

But I'm no expert. 

retroman62

Savvy_Sue said:

• Fred could have done anything he liked with the money - given it away, bought a new car, improved or adapted his house, gone on a world cruise. If he had given it away or spent it, it would not be taxable on death, because it would no longer be there to taxed

Yes if he had spent it, but No if he had gifted it- as the gift would have been less than 2 years before death so it would reduce his NRB.

JoSoap02

Would IHTM42813 which mentions industrial disease compensation not apply ?