With more estates becoming liable for Inheritance Tax (IHT), effective estate planning is becoming increasingly important. However, one often-overlooked option could help reduce your IHT liability while supporting a charitable cause.
Leaving at least 10% of your estate to charity could reduce the rate of Inheritance Tax payable from 40% to 36%. In some circumstances, this could also mean more money being passed on to your loved ones than would otherwise be the case.
Why Are More Estates Becoming Liable for Inheritance Tax?
Several factors are contributing to an increasing number of estates falling within the scope of IHT, including:
- Frozen tax thresholds: The nil rate band has remained at £325,000 since April 2009, while the residence nil rate band has been £175,000 since April 2020. The annual gift exemption has also remained at £3,000 since April 1981.
- Rising property values: Property prices have increased significantly over the years, pushing more estates above the IHT thresholds.
- Changes to Business and Agricultural Property Relief: From April 2026, the combined allowance for 100% Business Property Relief (BPR) and Agricultural Property Relief (APR) is restricted to £2.5 million. Qualifying assets exceeding this allowance generally receive relief at 50%, potentially increasing IHT liabilities.
- Changes to pension inheritance rules: From April 2027, most unused pension funds and pension death benefits will be included in estates for IHT purposes, potentially increasing the amount of tax payable.
With these changes in mind, it is worth reviewing your estate planning arrangements and considering the options available to mitigate a potential IHT liability.
How Can Leaving Money to Charity Reduce Inheritance Tax?
One option worth exploring is leaving at least 10% of your estate to charity.
Normally, Inheritance Tax is charged at 40% on the taxable portion of an estate. However, where qualifying charitable donations meet the required 10% threshold, the rate can be reduced to 36%.
Importantly, this does not necessarily mean leaving 10% of your entire estate to charity.
For IHT purposes, an estate can be divided into three components:
- The general component: Assets owned in your sole name, including your share of property owned as tenants in common.
- The survivorship component: Assets passing automatically to another person through joint ownership, such as certain jointly held bank accounts.
- The settled property component: Certain assets held within a trust in which you have a beneficial interest.
The reduced rate can apply where at least 10% of the qualifying baseline amount of an individual component is left to charity. This means that different components of an estate could potentially be taxed at different rates.
The 10% threshold is calculated after taking account of the available nil rate band and relevant exemptions and reliefs, such as qualifying Business or Agricultural Property Relief. The residence nil rate band is not deducted when calculating this particular threshold.
How Much Inheritance Tax Could You Save?
To demonstrate how charitable giving can reduce an IHT liability, consider the following example.
Ben Garrity has sadly passed away, leaving an estate worth £750,000.
All assets were held solely in his name, meaning the estate falls within the general component.
Under the terms of his will, Ben left £50,000 to the National Trust.
Assuming the standard £325,000 nil rate band is available, with no additional reliefs or allowances applying, the calculation is as follows:
| Description | Amount |
|---|---|
| Total estate value | £750,000 |
| Less nil rate band | £325,000 |
| Baseline amount | £425,000 |
| Minimum charitable gift required (10%) | £42,500 |
| Actual charitable donation | £50,000 |
Because Ben’s charitable donation exceeds 10% of the baseline amount, his estate qualifies for the reduced IHT rate of 36%.
The impact on the IHT liability is significant:
| IHT calculation | Amount |
|---|---|
| Taxable estate after nil rate band and charitable donation | £375,000 |
| IHT at the standard 40% rate | £150,000 |
| IHT at the reduced 36% rate | £135,000 |
| Inheritance Tax saving | £15,000 |
In this example, the National Trust receives a generous £50,000 donation, while the remaining beneficiaries receive an additional £15,000 compared with the position if the same charitable gift had been made but the standard 40% rate applied.
It demonstrates how thoughtful estate planning can benefit both charitable organisations and the people you wish to provide for.
What if Someone Has Already Passed Away?
There may still be an opportunity to benefit from the reduced IHT rate even after someone has died.
If a person has passed away within the previous two years and the charitable donations in their will fall below the qualifying 10% threshold, it may be possible to make changes through a deed of variation.
A deed of variation allows beneficiaries to redirect part of their inheritance, potentially increasing the charitable donation sufficiently to qualify for the reduced 36% IHT rate.
However, this requires the agreement of the affected beneficiaries and must meet the relevant legal and tax conditions.
It is important to assess whether increasing the charitable donation would produce a worthwhile financial benefit for the remaining beneficiaries.
Is It Time to Review Your Inheritance Tax Position?
With changes to Business Property Relief and Agricultural Property Relief now in effect, and further changes to the treatment of pensions due from April 2027, understanding your current and future IHT position is increasingly important.
Reviewing your estate now could help identify potential tax liabilities and opportunities to reduce the amount of IHT payable.
Our experienced tax specialists can help you understand your potential Inheritance Tax liability and explore the estate planning options available to you.
Whether you are considering charitable giving, reviewing your will or planning ahead for the upcoming pension changes, we can help you make informed decisions.
Contact our team today to discuss your Inheritance Tax position and how we can help you plan for the future.