Charitable Giving and Inheritance Tax UK: s23 Full Exemption, 36% Reduced Rate, and Legacy Planning (2026)
Charity legacies are 100% IHT-exempt under s23 IHTA 1984 — no limit, no 7-year clock. Leave 10% of the baseline to charity and the IHT rate on the entire estate drops to 36% (s36 IHTA). For a £1m estate this costs the family £12,000 and saves £38,000 in IHT — HMRC pays 76% of the charitable donation.
| Estate Size | Baseline | IHT Without Charity | Min Charity (10%) | IHT With 36% Rate | Net Family Cost of Charity |
|---|---|---|---|---|---|
| £500,000 | £0 (estate = NRB + RNRB; IHT = £0) | £0 | £0 (no IHT to reduce) | £0 | N/A — estate below threshold |
| £750,000 | £250,000 (£750k − £325k − £175k) | £100,000 (40% × £250k) | £25,000 (10% of £250k) | £81,000 (36% × £225k) | £19,000 (IHT saved); charity costs family £6k net (£25k gift − £19k IHT saving) |
| £1,000,000 | £500,000 (£1m − £500k thresholds) | £200,000 (40% × £500k) | £50,000 (10% of £500k) | £162,000 (36% × £450k) | £38,000 (IHT saved); charity costs family £12k net |
| £1,500,000 | £1,000,000 | £400,000 (40% × £1m) | £100,000 (10% of £1m) | £324,000 (36% × £900k) | £76,000 (IHT saved); charity costs family £24k net |
| £2,000,000 (single + RNRB) | £1,500,000 (£2m − £500k thresholds) | £600,000 (40% × £1.5m) | £150,000 (10% of £1.5m) | £486,000 (36% × £1.35m) | £114,000 (IHT saved); charity costs family £36k net |
| £3,000,000 (single — RNRB = £0, tapered) | £2,675,000 (£3m − £325k) | £1,070,000 (40% × £2,675k) | £267,500 (10% of £2,675k) | £866,700 (36% × £2,407.5k) | £203,300 (IHT saved); charity costs family £64k net; HMRC contributes 76% |
Charitable exemption: s23 IHTA 1984 — 100% exempt, no limit, no 7-year rule; lifetime or will. 36% reduced rate: s36 IHTA 1984 (Finance Act 2012) — ≥10% of baseline to qualifying charity; rate drops from 40% to 36% on entire chargeable estate. Baseline = net estate − NRB − RNRB − other exemptions (before charitable deduction). NRB: £325,000 (frozen to 2030). RNRB: £175,000 (frozen to 2030 — s8D IHTA 1984). RNRB taper: s8E IHTA — RNRB reduces above £2m adjusted net estate; single fully tapered at £2,350,000 (RNRB = £0). All examples show NRB + RNRB both available (estate below £2m unless shown) or RNRB = £0 (estate above taper). Net family cost of donation = charity gift minus IHT saving (= the amount the family 'paid' for the charity gift; HMRC paid the rest). Qualifying charities: Charities Act 2011 registration (England & Wales); Scottish charity; certain EEA charities. Lifetime gifts to charity: s23 exempt immediately; not a PET; no 7-year clock. Share gifts: s257 TCGA 1992 — no CGT on accrued gain; s428 ITA 2007 — income tax deduction on market value. Gift Aid: basic rate (20%) reclaimed by charity; higher/additional rate reclaimed by donor on self-assessment. Payroll giving: pre-tax income donated; effective rate = marginal tax rate.
Charitable Giving and IHT: Complete Guide
Section 23 IHTA 1984 — the unlimited charitable exemption
Section 23 IHTA 1984 provides that any transfer of value to a qualifying charity is wholly exempt from IHT. There is no limit on the amount. It applies to: outright lifetime gifts to charity (immediately exempt — not even treated as a PET; no 7-year clock); legacies to charity in a will (charitable legacy in the estate — fully exempt); transfers into charitable trusts. The charitable exemption under s23 is one of the most generous reliefs in the UK tax code: it applies at any estate size; there is no cap; there is no holding period; there is no 7-year clawback. A person who gives £1m to charity in their will reduces their taxable estate by £1m — saving £400,000 in IHT (and the charity receives the full £1m). The qualifying charities include: charities registered with the Charity Commission for England and Wales; Scottish charitable incorporated organisations (SCIOs); Northern Ireland charities registered with HMRC; certain EEA charities (post-Brexit status under domestic legislation); community interest companies (some may qualify, depending on structure). Gifts to non-UK, non-EEA charities do not qualify for s23 exemption — a UK donor wishing to support a foreign cause should give through a UK registered charity that operates internationally (such as a major international NGO registered in England and Wales).
The 36% reduced IHT rate — how it works and who benefits most
Section 36 IHTA 1984 (inserted by Finance Act 2012) reduces the IHT rate from 40% to 36% when at least 10% of the 'baseline amount' is left to qualifying charities. The calculation: (1) Identify the net estate: total assets minus liabilities; (2) Calculate the NRB applicable (including transferred NRB if married); (3) Calculate the RNRB applicable (including transferred RNRB if married); (4) Subtract NRB and RNRB from the net estate to find the baseline; (5) Calculate 10% of the baseline — this is the minimum charitable gift to qualify; (6) If the will leaves at least this amount to charity: the ENTIRE chargeable estate (not just the part above the 10%) is taxed at 36% (not 40%). Who benefits most from the 36% rate: (a) estates where the taxable estate (above NRB + RNRB) is large — a bigger taxable estate means the 4% rate reduction saves more in absolute terms; (b) estates where a charity legacy is already planned — the will just needs to be drafted to hit the 10% threshold; (c) estates where the RNRB is fully tapered (above £2.35m for single) — the baseline is larger, so the 10% threshold is higher, but the rate saving is also larger. Opt-in and opt-out: the charitable legacy in the will can specify whether the estate opts into the 36% rate; the executor can make an election. If the charitable legacy is variable (a percentage of residue), the 36% rate applies automatically if the 10% threshold is met.
Wording charitable legacies in a will — percentage vs fixed sum
The most important drafting decision for a charitable legacy is whether to use a fixed sum or a percentage of the residuary estate. Fixed sum legacy: 'I give £50,000 to Charity X'. Clear and certain. But: (a) if the estate falls in value (property market decline; care home costs deplete the estate), the charity still gets £50,000 and there may be less for the family; (b) if the estate grows, the charity's share stays fixed and does not benefit; (c) most critically: a fixed sum charitable legacy may or may not meet the 10% baseline threshold depending on how the estate value moves. Percentage legacy: 'I give 10% of my residuary estate to Charity X'. Automatically adjusts with the estate value. Always hits the 10% baseline threshold if the estate size changes (a 10% of residue gift always = 10% of the taxable estate, approximately). Preferred for 36% rate planning. Combination: 'I give the greater of £50,000 or 10% of my residuary estate to Charity X'. Protects both a minimum guaranteed amount and the 36% rate qualification. Letter of wishes: executors should be given a letter of wishes explaining the charitable legacy's purpose and whether the 36% rate should be claimed — they have discretion whether to claim it. Community foundation: for families wanting to spread donations across multiple charities over time, a community foundation (such as the local community foundation) can be the named legacy beneficiary — it holds the fund and distributes to chosen charities according to the donor's wishes.
Lifetime charitable giving — shares, Gift Aid, and income tax relief
Charitable giving in lifetime combines IHT and income tax benefits. Gift Aid: when a UK taxpayer makes a cash donation to a registered charity, the charity reclaims basic rate tax (20%) from HMRC. A higher or additional rate taxpayer can claim the additional relief via their self-assessment return. Example: a 40% taxpayer donates £100 cash; charity reclaims £25 basic rate (total = £125); donor reclaims £25 on self-assessment (net cost = £75); HMRC has paid £50 of the £125 donation. Gifting shares directly to charity: if an investor holds shares with an unrealised capital gain and donates them directly to charity (not sells and then donates cash), BOTH the IHT exemption (s23 IHTA) AND the CGT exemption apply — no CGT on the accrued gain (s257 TCGA 1992, as amended by Finance Act 2000). Income tax relief for the full market value of the shares is available under s428 ITA 2007. This makes direct share gifts one of the most tax-efficient forms of charitable giving. Payroll giving: pre-tax salary donated through an employer payroll giving scheme; £1 donated costs a 40% taxpayer only 60p (immediate relief at source). IHT and lifetime giving: lifetime gifts to registered UK charities are s23 IHTA exempt immediately — not a PET, no 7-year clock. A large lifetime charity gift both reduces the IHT estate immediately AND provides income tax relief via Gift Aid or share donations.
How to structure a charitable legacy to maximise the IHT benefit
Practical steps to optimise the charitable legacy for IHT: (1) Estimate the estate value: use a rough estate value calculation (property + savings + investments + pension from April 2027); deduct NRB and RNRB; the result is the baseline for the 36% rate calculation. (2) Calculate the minimum charity legacy for 36% rate: 10% of the baseline. Check whether this is an amount you are comfortable giving — it is the threshold, not the ceiling. (3) Use a percentage-of-residue legacy: express the charitable gift as 'X% of my residuary estate' to ensure the 10% threshold is always met even as estate values change. (4) Name a substitute charity: charities change, merge, or close; name a substitute charity (or instruct the executors to choose a replacement) in case the primary charity no longer exists at death. (5) Check the charity's registration: use the Charity Commission register to confirm the charity is still registered at the time of drafting; include the registered charity number in the will to avoid ambiguity. (6) Inform the charity: many charities have legacy teams who can assist with wording and provide acknowledgment letters; this also ensures the charity is prepared to receive the legacy. (7) Keep the will current: the 36% rate calculation is based on the estate AT DEATH — an out-of-date will with a fixed legacy sum may miss the threshold as the estate grows or shrinks. Review the will every 3-5 years or after major estate changes.
Frequently Asked Questions
How does leaving money to charity reduce inheritance tax?
Leaving money to charity reduces IHT in two ways: (1) s23 IHTA 1984 full exemption: any amount left to charity is fully exempt from IHT — it reduces the taxable estate pound for pound. Example: £200,000 legacy to charity reduces the taxable estate by £200,000, saving £80,000 IHT at 40%. (2) s36 IHTA 1984 reduced 36% rate: if at least 10% of the baseline (net estate minus NRB minus RNRB) is left to charity, the entire IHT rate drops from 40% to 36% — saving a further 4% on all the taxable estate. Combined: the charitable legacy is fully exempt AND the remaining estate is taxed at 36%. HMRC effectively subsidises a large proportion of the donation. For a £1m estate: baseline = £500k; 10% = £50k; charity gets £50k; IHT falls from £200k to £162k; family's net cost of the donation = £12k.
What is the 36% inheritance tax rate and how do I qualify?
The 36% reduced IHT rate (s36 IHTA 1984) applies when at least 10% of the 'baseline amount' is left to qualifying charities. The baseline = the net estate minus the NRB (£325,000) minus the RNRB (up to £175,000 if applicable). If the will leaves at least 10% of this baseline to charity, the IHT rate on the entire chargeable estate drops from 40% to 36%. Example: £1m estate; NRB £325k; RNRB £175k; baseline = £500k; 10% of baseline = £50,000 minimum charity gift. With £50k to charity: IHT = 36% × (£500k − £50k) = 36% × £450k = £162,000 (vs £200,000 without charity). The 4% rate reduction applies to all the taxable estate, not just the part above 10%. Use a percentage-of-residue charitable legacy in the will to ensure the 10% threshold is met automatically as estate values change.
Is a gift to charity in my lifetime exempt from IHT?
Yes — under s23 IHTA 1984, outright gifts to registered UK charities (and qualifying EEA charities) are fully exempt from IHT. Crucially, a lifetime gift to charity is NOT treated as a potentially exempt transfer (PET) — there is no 7-year clock and no risk of the gift being pulled back into the estate. It is immediately exempt. This makes charity giving one of the very few forms of lifetime giving where the donor gets an immediate IHT exemption with no waiting period. Additional benefits: if the donor gives shares rather than cash, no CGT is charged on accrued gains (s257 TCGA 1992); income tax relief is also available on the market value via Gift Aid; payroll giving is pre-tax.
Should I use a fixed sum or percentage legacy for a charity in my will?
A percentage-of-residue legacy is almost always better for IHT planning purposes. A fixed sum legacy (e.g. 'I leave £50,000 to Charity X') may or may not meet the 10% baseline threshold depending on the estate size at death. If the estate grows, the charitable percentage falls below 10% and the 36% rate is lost. If the estate shrinks, the charity's share may be disproportionately high. A percentage legacy (e.g. 'I leave 10% of my residuary estate to Charity X') always hits the 10% threshold (roughly) regardless of estate size fluctuations. It adjusts automatically. For estates where achieving the 36% rate is a goal, use: 'I give 10% of my residuary estate to Charity X (registered charity number XXXXXX), or such other charity as my executors shall select.' Name a substitute in case the charity closes or merges before your death.
Can I give shares to charity and avoid both IHT and CGT?
Yes — donating qualifying investments (listed shares, unit trusts, OEICs) directly to a registered charity is one of the most tax-efficient charitable giving strategies: (1) IHT: the donation is s23 IHTA 1984 exempt — full market value of the shares is deducted from the estate; (2) CGT: no capital gains tax is payable on any accrued gain in the shares — s257 TCGA 1992 applies; the deemed disposal for CGT purposes is at a gain of £0; (3) Income tax: the donor can deduct the full market value of the shares from their income tax liability for the year (s428 ITA 2007 — available for gifts of listed shares and securities to qualifying charities); (4) No Gift Aid complication: the income tax relief is claimed directly; no Gift Aid declaration needed. Example: shares worth £100,000 with a cost base of £10,000 (unrealised gain = £90,000). Selling and donating cash: CGT on £90,000 gain (at 18-24%); then Gift Aid on £80,300 net proceeds. Donating shares directly: zero CGT; full income tax deduction on £100,000; charity receives £100,000 in full. The shares route saves approximately £16,000-£21,600 in CGT plus delivers a higher charity amount.
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