Charitable Legacy and IHT: Section 23 IHTA 1984 Exemption and the 10% Reduced Rate of 36%
Gifts to UK charities in a will are fully exempt from IHT — with no upper limit. Better still, if you leave at least 10% of your estate to charity, the IHT rate on the rest drops from 40% to 36%. In some cases, giving more to charity means your family receives more — because the IHT saving on the taxable estate exceeds the additional charitable gift.
How the Charitable IHT Exemption Works
Section 23 IHTA 1984: unlimited charitable gift exemption
Under s23 IHTA 1984, a transfer of value is exempt from IHT to the extent that the value transferred is attributable to property which is given to a charity. This exemption applies on death (charitable legacies in wills) and during lifetime (gifts to charities are not PETs or CLTs). The exemption is unlimited — there is no cap on the amount that can be given to charity free of IHT. A person who wishes to leave their entire estate to charity would pay no IHT at all. Qualifying charities include: (1) charities registered with the Charity Commission for England and Wales; (2) UK charities in Scotland, Northern Ireland, or equivalent; (3) charities established in EU or EEA member states that would be registered as charities in the UK (following FA 2010 changes); and (4) community amateur sports clubs (CASCs) registered with HMRC.
The 10% charitable legacy rule — reduced IHT rate of 36%
Schedule 1A IHTA 1984 (inserted by Finance Act 2012) provides a reduced IHT rate of 36% (rather than 40%) where a person leaves at least 10% of their 'baseline amount' (broadly, the net estate after deductions but before the charitable legacy itself) to charity. The calculation is based on three components: (1) the 'survivorship component' — assets passing by survivorship; (2) the 'settled property component' — assets in trust; and (3) the 'general component' — the rest of the estate. Each component is assessed separately. If any component meets the 10% threshold, the 36% rate applies to that component. The components can be merged to allow a shortfall in one to be covered by an excess in another. The rule creates a unique situation where giving more to charity (to cross the 10% threshold) can actually result in the non-charitable beneficiaries receiving more — because the 4% IHT rate saving on the taxable estate often exceeds the additional charitable gift.
When the 10% rule makes financial sense
The 10% rule is most powerful where the estate is just below the 10% threshold — giving a small additional charitable gift can trigger the 36% rate and save significant IHT on the taxable estate. Example: an estate of £1m (after NRBs, with £200,000 taxable). A charitable gift of £20,001 (10% of the baseline amount) reduces the IHT from 40% × £180,000 = £72,000 to 36% × £180,000 = £64,800. The IHT saving is £7,200. The additional charitable gift (compared to £20,000) costs a penny — but saves £7,200 in IHT for the non-charitable beneficiaries. Where the charitable legacy is near the threshold, the testator (or executors with power to vary) should consider whether increasing the charitable gift to the 10% threshold is in the overall beneficiaries' best interests.
The opt-out: merging components and elections
The Schedule 1A calculation involves multiple elections and complex component rules. Key points: (1) merging: where the charitable gift meets the 10% threshold in one component but not another, components can be 'merged' — the total charitable gift across all components is expressed as a percentage of the total baseline amount. This allows a large charitable legacy from the 'general component' to cover a shortfall in the 'survivorship component'. (2) Opting out: if for some reason the reduced rate is not beneficial (e.g. in very unusual circumstances), the personal representatives can opt out and pay IHT at the standard 40% rate. (3) Variation: executors and beneficiaries can enter into a deed of variation within 2 years of death to redirect part of the estate to charity — triggering the 10% rule retrospectively for IHT purposes (provided the variation conditions under s142 IHTA 1984 are met).
Charities that qualify under s23 IHTA
A 'charity' for s23 purposes must meet the definition in s272 IHTA 1984 (as amended by FA 2010): bodies established for charitable purposes only, which are resident in the UK, EU, or EEA. HMRC maintains a list of non-UK charities that have been accepted as qualifying. Practically, the following always qualify: all UK charities registered with the Charity Commission (including universities, NHS foundations, hospices, and arts organisations registered as charities); community amateur sports clubs registered with HMRC; and most well-known EU and EEA-based international charities. Political parties and campaign organisations do not qualify as charities for IHT purposes (though s24 provides a separate exemption for gifts to qualifying political parties — limited to parties with at least 2 MPs). Gifts to foreign foundations or international organisations that are not registered charities should be checked individually.
Frequently Asked Questions
Can you include a charitable legacy in your will without it affecting other beneficiaries?
Yes — a charitable legacy in a will is typically a specific pecuniary or percentage legacy (e.g. '£10,000 to Cancer Research UK' or '5% of my residuary estate to Macmillan Cancer Support'). This does not affect the other beneficiaries' entitlements — they receive whatever is left after the charitable legacy and other specific gifts. Where the charitable legacy is structured to trigger the 10% rule (reducing IHT from 40% to 36%), the non-charitable beneficiaries may actually receive more in total than if no charitable legacy had been made — because the IHT saving exceeds the charitable gift (see the 10% rule example above).
Is a gift to a charity during your lifetime also exempt from IHT?
Yes — s23 IHTA 1984 applies to both lifetime gifts and testamentary gifts (in wills). A gift to a registered UK charity during the donor's lifetime is immediately exempt from IHT — it is not a PET and there is no 7-year clock. It comes off the donor's estate immediately. This can be a valuable planning tool: making significant charitable gifts during lifetime reduces the estate for IHT (immediately, not just after 7 years), and the gift may also qualify for income tax Gift Aid relief (increasing the value of the gift to the charity by 25%) and for higher-rate income tax relief (if the donor is a higher-rate taxpayer).
How does the 10% charitable legacy rule interact with the NRB and RNRB?
The 10% rule is applied to the 'baseline amount' — which is the net estate after deducting: (1) the available NRB; (2) the available RNRB; and (3) other IHT exemptions (spousal exemption, etc.). The charitable gift is deducted from the baseline amount, and the 10% test is applied to the resulting net. This means the NRB and RNRB are taken into account before the 10% threshold is calculated. For estates with a full NRB (£325,000) and RNRB (£175,000) — giving a combined £500,000 exempt amount — the 10% rule only applies to the portion above £500,000. For a £700,000 estate, the taxable amount is £200,000 and the 10% threshold is £20,000 charitable legacy.
What if the charity ceases to exist before the estate is administered?
If a charity named in a will ceases to exist or loses its charitable status before the testator's death (or before the legacy is paid out), the legacy typically fails — it goes back into the residue and is distributed to the residuary beneficiaries. The IHT exemption is lost on that legacy (no longer exempt). To avoid this risk: (1) name a specific charity with its registered charity number in the will; (2) include a substitution provision in the will directing the legacy to a similar charity if the primary one ceases to exist; or (3) make a charitable gift to a donor-advised fund or foundation that can distribute to multiple charities — surviving the testator regardless of the fate of any individual charity. Updating the will when charities merge or dissolve is also good practice.
Can executors make charitable gifts after death to trigger the 10% rule?
Where a will does not include a charitable legacy (or the legacy is below 10%), executors cannot unilaterally make charitable gifts to trigger the 10% rule — they must follow the will. However, beneficiaries can enter into a deed of variation within 2 years of the death, redirecting part of their inheritance to charity. If the deed of variation is properly executed and meets the s142 IHTA 1984 conditions (including a statement that it is for IHT purposes), the charitable gift is treated as if it had been made by the deceased in the will — and the 10% rule can be triggered retrospectively. All affected beneficiaries must agree to the variation (which reduces their shares). This is a powerful post-death planning tool, particularly where the estate is just below the 10% threshold.
Does leaving money to charity affect the NRB available to the estate?
No — the charitable exemption under s23 is separate from the NRB. The NRB applies to the chargeable estate — the total estate minus exempt transfers (spousal exemption, charitable exemption, etc.). A charitable legacy reduces the chargeable estate but does not 'use up' the NRB. The NRB applies to whatever remains after the charitable (and spousal) exemptions have been taken off. For example: estate £1m, charitable legacy £100,000, NRB £325,000. Chargeable estate = £1m – £100,000 (charity) – £325,000 (NRB) = £575,000. IHT at 40% on £575,000 = £230,000. The charity and the NRB both reduce the taxable estate independently.
Include a Charitable Legacy in Your Will — and Reduce Your IHT Bill
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