Deed of Variation to Charity: Reducing IHT from 40% to 36%
Leave 10% of the net estate to charity and every beneficiary pays IHT at 36% instead of 40%. A deed of variation can introduce this charity gift after death — sometimes saving more than it costs.
The Numbers: Is the 10% Gift Worth It?
Taxable estate above NRB: £600,000
Without charity gift (40% IHT)
IHT: 40% × £600,000 = £240,000
Net to family: £360,000
With 10% charity gift (36% IHT)
Charity gift: £60,000
IHT: 36% × £540,000 = £194,400
Net to family: £345,600
Family loses: £14,400
Charity receives: £60,000
The family gives up £14,400 so the charity receives £60,000 — the IHT saving reduces the true cost of the charity gift by 76%.
Frequently Asked Questions
How does leaving money to charity reduce IHT from 40% to 36%?
Under Schedule 1A Inheritance Tax Act 1984 (introduced by Finance Act 2012), if 10% or more of the 'baseline amount' of the estate is left to qualifying charities, the IHT rate on the remainder of the estate is reduced from 40% to 36%. The baseline amount is broadly the value of the taxable estate above the available nil-rate band (including any transferable nil-rate band). Qualifying charities are those registered in the UK, EU, or certain other qualifying jurisdictions. The 4% reduction in IHT rate applies to the entire taxable estate — not just the portion above the 10% threshold. This means a relatively modest charitable gift can produce a disproportionate IHT saving on a large taxable estate.
When does a deed of variation to charity make financial sense?
A deed of variation can redirect a gift from a taxable beneficiary to charity, potentially triggering the 36% reduced rate. The calculation to test whether it is worth doing: (1) Calculate the IHT saving from the reduced rate (4% × taxable estate); (2) Calculate the cost to the estate of the charity gift (the amount redirected, less the IHT saving on that amount). The rule of thumb: if the charity gift is exactly 10% of the baseline amount, the estate pays 10% to charity but saves 4% of the whole taxable estate in IHT. For the reduced rate to be worthwhile, the IHT saving must exceed the net cost of the charity gift to the non-exempt beneficiaries. Example: taxable estate above NRB = £600,000. 10% gift to charity = £60,000. IHT saving = 4% × £600,000 = £24,000. Net cost of the charity gift = £60,000 − £24,000 IHT saving = £36,000. Non-exempt beneficiaries give up £36,000 in exchange for £60,000 going to charity and a £24,000 IHT saving. Whether this is 'worth it' depends on the beneficiaries' wishes — but the charity receives 67% more than it 'costs' the beneficiaries.
How can a deed of variation introduce a charity gift after death?
A deed of variation (also called a deed of family arrangement) is a legal document that redirects an inheritance after the death of the testator. Beneficiaries who are entitled to receive a gift can vary their entitlement — redirecting part of their inheritance to a charity. For the charity IHT relief to apply: (1) The deed must be executed within 2 years of the death; (2) The deed must include the written statements required by s142 IHTA 1984 (election to treat the variation as relating back to the death); (3) The charity gift must reach the 10% threshold of the baseline amount. Practical process: the beneficiaries agree to redirect a sufficient amount to charity; a solicitor drafts the deed; all affected beneficiaries sign; the deed is submitted to HMRC with the IHT corrective account. The variation is treated as if the deceased made the charity gift directly — triggering the 36% rate retrospectively.
What is the 'merging' option for the 10% charity IHT relief?
For estates containing multiple components (broadly: survivorship property, trust assets, and the death estate), the 10% test can be applied separately to each component or the components can be 'merged' and treated as a single pot for the 10% calculation. Merging can be advantageous where one component has a large charitable gift (above 10%) and another has none — merging allows the excess from one to compensate the shortfall in another. The election to merge must be made in writing to HMRC. Opt-out: if a component already qualifies independently (10%+ to charity) but the beneficiaries do not want the merged calculation to apply to them, they can elect to opt out of the reduced rate for their component. These elections are complex and typically require specialist advice. They must be made within 2 years of death.
Does the 10% charity IHT relief apply if the will already includes a charity gift?
Yes — if the will already leaves 10% or more of the net estate (above the available nil-rate band) to qualifying charities, the 36% rate applies automatically without a deed of variation. A deed of variation is only needed if: (1) The will does not include a sufficient charity gift and the beneficiaries wish to introduce one; (2) The will includes a charity gift below 10% and the beneficiaries wish to increase it to the threshold; (3) There is no will and the estate is passing by intestacy (no charity gifts arise on intestacy, so only a deed of variation can create them). Many people include a 10% charity clause in their will specifically to lock in the 36% rate — combining altruistic giving with a concrete IHT saving.
Include a 10% Charity Clause in Your Will
Including a 10% charitable legacy in your will locks in the 36% IHT rate automatically — no deed of variation needed. The WillSafe kit from £19.97 for England and Wales.