Inheritance Tax and charities: how gifts affect your IHT bill

More and more people are choosing to leave something to charity in their Will. Indeed, almost one in three people over 40 have included a gift to one or more worthy causes.

Often people give because they want to support a cause they care about. Sometimes, it’s part of a strategy to reduce the amount of Inheritance Tax (IHT) their family ends up paying. Increasingly, it’s a bit of both.

If you’re looking for help with how IHT and charities intersect, this article explains when a gift to charity is IHT-free, and when it can reduce the IHT rate on the rest of your estate from 40% to 36%.

Before we begin, there are two key concepts to understand:

1. Gifts to a qualifying charity are usually tax-free. They are deducted from your estate before tax is calculated.
2. The “10% Rule”. If you leave at least 10% of your net estate (specifically, 10% of a “baseline amount”) to charity, the IHT rate on the rest of your taxable estate drops to 36%.

That second point is valuable – but the calculation is stricter than many people realise. Let’s look at how it works and what to watch for.

A quick note on nil-rate bands and spouses

Before we get into the nitty gritty, it’s worth noting that, for many estates, IHT is not calculated on the full value of what you own. This is usually because of the following factors:

• Spouse and civil partner exemption. Anything left to your spouse or civil partner is usually free of IHT. This often means no IHT is due on the first death if everything passes to the surviving spouse or civil partner.
• Nil-rate band (NRB). Most people can pass on up to £325,000 before IHT applies.
• Residence nil-rate band (RNRB): There may be an extra allowance (currently up to £175,000) if you leave a qualifying home to direct descendants, subject to the rules.
• Transferable allowances. If everything is left to a spouse or civil partner, any unused nil-rate band (NRB) can usually be transferred to the survivor. It may also be possible to claim any unused residence nil-rate band (RNRB) on the second death (subject to the conditions), potentially doubling the available allowances.

These allowances can affect the calculations behind the 10% charity test, which is one reason advice is helpful before you change a Will.

1. Charitable gifts in your Will are normally IHT-free

If you leave money or other assets to a qualifying charity in your Will, that gift is taken out of your estate before your Inheritance Tax bill is calculated.

You can leave the following types of bequest to charity:

• A fixed sum (e.g., £25,000 to a specific charity)
• A specific asset (e.g., a painting, property or shares)
• A share of the estate’s residue (a percentage of what is left after other gifts and debts are paid)

In each case, the gift to the charity is usually exempt from Inheritance Tax, so it doesn’t form part of the estate that’s taxed. This effectively lowers the total value of your estate that is subject to tax.

2. The 36% rate: how the “10% Rule” actually works

There is an additional IHT relief that is often summarised as: “Leave 10% to charity and pay less tax.”

While broadly true, the 10% test is not based on your total estate value. It is based on the “baseline amount” – the figure used to test whether the 10% condition is met.

In practical terms, the calculation generally follows these steps:

1. Start with your total estate value.
2. Deduct debts, funeral costs and specific reliefs (such as Business Relief or Agricultural Property Relief).
3. Deduct your available Nil-Rate Band (usually £325,000). Note: you do not deduct your Residence Nil-Rate Band (RNRB)
4. The result is the “Baseline Amount.”

If your charitable gifts amount to 10% or more of this baseline, the IHT rate on the remaining taxable estate is charged at 36% instead of the usual 40%.

Note: This calculation can get complicated if your estate has different “components” (for example, if you have assets in a Trust). It is vital to get professional calculations done before finalising your Will.

3) A quick example

Let’s look at a simple example to get an insight into how giving to charity could affect your IHT bill. This example assumes the estate qualifies for the RNRB and that it is not tapered.

The scenario:

• Estate value: £900,000
• Nil-rate band (NRB): £325,000
• Residence nil-rate band (RNRB): £175,000
• Charitable gift in the Will: £60,000
• (Ignoring other reliefs for illustration)

Step 1: Check whether the £60,000 gift qualifies for the 36% rate

To qualify, the charitable gift must be at least 10% of the baseline amount.

• Baseline amount (simplified): £900,000 ? £325,000 NRB = £575,000
• 10% threshold: £57,500
• Charitable gift: £60,000 (so the reduced 36% rate applies)

Without a charitable gift

• Total allowances: £325,000 + £175,000 = £500,000
• Taxable amount: £900,000 ? £500,000 = £400,000
• IHT at 40% = £160,000

With a £60,000 charitable gift (and the 36% rate applies)

• The £60,000 gift is IHT-exempt, so the estate for IHT is effectively: £900,000 ? £60,000 = £840,000
• Taxable amount: £840,000 ? £500,000 = £340,000
• IHT at 36% = £122,400

As you can see, compared with no charitable gift, the IHT bill falls from £160,000 to £122,400 – a reduction of £37,600.

This doesn’t mean your family will receive more than they would have done without the gift. However, it can mean you support a cause you care about – all while reducing the share that goes to the taxman.

If everything passes to a spouse or civil partner on the first death, IHT may not be due at that stage. The charity and reduced-rate calculations then become more relevant when you are planning for the second person’s death.

4) Common pitfalls to avoid regarding Inheritance Tax and charities

The rules are precise, and small mistakes can lead to the relief being denied.

Make sure the charity qualifies (very important for pre-2024 Wills)

From 1st April 2024, the rules changed. Non-UK charities (including many in the EU) generally no longer qualify for UK charitable tax reliefs.

• Action: If you have a Will that was written before 2024 and it includes a legacy to an overseas charity, you need to review it immediately. The legacy may no longer be IHT-exempt and, as such, it may not count towards the 10% test.

Be careful with “fixed sums”

If you leave a fixed cash amount to charity (say, £50,000), it can be risky if you are aiming for the 36% rate. If your estate grows in value, that £50,000 might drop below the required 10% threshold, disqualifying you from the relief.

• The Solution: Consider using a “formula-based legacy.” This is a specific clause in your Will that instructs your executors to give “such a sum as represents 10% of my baseline amount.” This ensures you always hit the target, regardless of how asset values change.

Your Will wording must be precise

A surprising amount of IHT trouble comes from unclear drafting – notably about whether the tax should be paid before or after the charitable share is calculated. You don’t need to be a technical expert, but you do need to ensure your solicitor and accountant are in agreement on the wording.

Stay alert to rule changes

Estate planning isn’t a “do it once and forget it” task. For example, the government plans to bring most unused pension funds into the scope of Inheritance Tax from April 2027. This could greatly increase the size of many estates and change the “baseline” calculation.

5) Inheritance Tax and charities – what to do next

If you are trying to answer the question “How much do I need to leave to qualify?”, HMRC offers a reduced-rate calculator that can provide a rough estimate.

However, because the “baseline” depends on reliefs, nil-rate bands, and asset valuations, it’s best to get professional advice about how Inheritance Tax and charities interact.

THP’s friendly and expert accountants can help you:

• Calculate the exact figure required to qualify for the 36% rate.
• Review your existing Will to check for non-UK charities or outdated fixed-sum clauses.
• Structure your estate efficiently to maximise what goes to your loved ones and the causes you support.

Get in touch today to book a free, no-obligation discussion about your Inheritance Tax planning.