IHT Reduced Rate for Charitable Legacies UK: Pay 36% Instead of 40% When You Leave 10% to Charity
Leave at least 10% of your taxable estate to charity and the IHT rate drops from 40% to 36%. In many estates, the IHT saving exceeds the additional charitable gift needed — making both the charity and the family better off than if no charitable legacy had been made at all.
How the 36% Reduced IHT Rate Works
What is the 10% charitable legacy reduced rate?
From 6 April 2012, where the total charitable donations from a deceased's estate equal at least 10% of the 'baseline amount', the rate of IHT on that estate (or component of it) reduces from 40% to 36%. The reduced rate is provided by section 24 Finance Act 2012, now set out in Schedule 1A IHTA 1984. The reduction applies to the IHT rate itself — so instead of paying £400,000 IHT on a £1 million taxable estate (40%), the estate pays only £360,000 (36%). The estate pays 4% less IHT. In some circumstances, this means the charity and the family both benefit: the reduced IHT saving can be greater than the additional charitable gift needed to reach the 10% threshold. This is a planning tool — with a small increase in the charitable legacy, the total family benefit can increase while the charity also receives more.
What is the 'baseline amount'?
The 'baseline amount' is the figure on which the 10% charitable legacy threshold is calculated. It is not the whole estate — it is the estate after deducting: (1) The available nil rate band (including the residential nil rate band) attributable to the component being considered; (2) All charitable legacies (to avoid circularity). In simple terms, for a single estate with no trusts and no surviving spouse: Baseline amount = Estate value − Nil rate band (£325,000) − RNRB (if applicable) − Other exempt transfers. The charitable legacy must be at least 10% of this baseline amount to trigger the 36% rate. For a person with a £1 million estate, using the full £325,000 NRB and £175,000 RNRB: Baseline amount = £1,000,000 − £325,000 − £175,000 = £500,000. 10% of £500,000 = £50,000. So a charitable legacy of at least £50,000 would reduce the rate from 40% to 36% on the remaining £450,000 taxable estate. At 36%: IHT = £162,000; at 40%: IHT = £180,000. Saving = £18,000. The charitable legacy costs £50,000 but the IHT saving for the family is £18,000 — net cost to family = £32,000. The charity receives £50,000.
The three estate components
The reduced rate is tested separately for each of three 'components' of the estate: (1) The 'survivorship component': assets passing by survivorship (e.g. jointly owned property passing to a surviving joint tenant under the right of survivorship). (2) The 'settled property component': assets held in a trust where the deceased had a qualifying interest in possession (a life interest). (3) The 'general component': the residue — everything else passing under the will or intestacy. The 10% test is applied separately to each component. A charitable legacy from one component does not automatically count towards the 10% test for another component. Most estates have only a general component — there is no survivorship component (the deceased owned property solely) and no settled property component (the deceased had no life interest in a trust). In these simple cases, the 10% test applies to the baseline of the general component only.
The merging election
Where a deceased has more than one component (e.g. both a survivorship component and a general component), the personal representative can elect to 'merge' two or more components and treat them as a single component for the 10% test. Merging is useful where: (1) The charitable legacy from one component exceeds 10% of its baseline but another component does not meet the 10% threshold — merging may bring the combined baseline over the 10% threshold; or (2) Merging increases the overall IHT saving across the combined components. The merging election must be made by the personal representative — it is an active choice, not automatic. The calculation of whether to merge requires comparing: (a) the IHT payable without merging (each component at its own rate, possibly 36% for those meeting the 10% threshold and 40% for those not); versus (b) the IHT payable with merging (all merged components at 36% or 40% depending on whether the merged baseline meets the 10% threshold). In many estates, merging increases the overall IHT saving.
Opting out of the reduced rate
Where qualifying for the reduced rate is disadvantageous (an unusual situation), the personal representative can opt out. An opt-out election means the estate pays 40% IHT but the charitable legacy does not need to reach the 10% threshold. An opt-out might be considered where: (1) The charitable legacy is just below the 10% threshold and the estate would need to increase it significantly to qualify; and (2) The IHT saving from the 36% rate is less than the additional charitable legacy needed to meet the 10% threshold. The opt-out must be made to HMRC as part of the IHT account process. In practice, the reduced rate almost always benefits the combined interests of charity and family — the opt-out is rarely used.
Planning your will to qualify for the 36% rate
To ensure the estate qualifies for the 36% reduced rate: (1) Calculate the likely baseline amount (estate value minus nil rate band, RNRB, and spousal exemption). (2) Direct a charitable legacy of at least 10% of the baseline amount to one or more qualifying charities. HMRC-registered charities (UK or EEA charities with equivalent status) qualify. (3) The legacy can be: a pecuniary (fixed cash) legacy, a specific legacy of an asset, a share of residue, or a combination. (4) If the charitable legacy is a share of residue, the percentage of residue must be calculated to ensure it meets the 10% of baseline threshold — this may need to be a percentage of the taxable estate rather than the entire estate. (5) Include a mechanism in the will to adjust the charitable legacy if the nil rate band or RNRB changes, so the 10% threshold is always met. (6) Leaving exactly 10% of the baseline amount is the minimum — consider whether leaving a slightly higher percentage would increase the benefit for the family as well as the charity.
Frequently Asked Questions
What is the reduced rate of IHT when you leave money to charity?
Since 6 April 2012, if you leave at least 10% of the 'baseline amount' of your estate to charity, the IHT rate on your estate reduces from 40% to 36%. This is set out in Schedule 1A IHTA 1984. The baseline amount is broadly the estate value minus the available nil rate band and other exempt transfers. The 36% rate applies to the whole of the taxable part of that component of the estate — not just the amount above the charitable legacy.
Can leaving money to charity save IHT for my family?
Often yes. By increasing a charitable legacy to meet the 10% threshold, the IHT rate on the remainder drops from 40% to 36%. Depending on the size of the estate, the IHT saving (4% on the taxable estate) can be larger than the additional charitable gift needed. In some cases, both the charity and the non-charitable beneficiaries end up better off than if no charitable legacy had been made. A financial planner or solicitor can calculate the exact outcome for your estate.
Does the charity have to be registered with HMRC?
Yes — only qualifying charities count towards the 10% threshold. UK-registered charities (with HMRC recognition) qualify. Community amateur sports clubs (CASCs) and some EEA-equivalent charities may also qualify. Gifts to political parties, individuals, or non-qualifying organisations do not count for the reduced rate or the general charity exemption.
What is the baseline amount for the 10% charity test?
The baseline amount is calculated for each estate component as: the component's total value minus the available nil rate band attributable to that component, minus any other exempt transfers (but not the charitable legacy itself). For a simple estate: estate value minus the NRB (£325,000) and RNRB (up to £175,000 if available). The charitable legacy must be at least 10% of this baseline.
Can I include the reduced rate in my will now?
Yes — you can include a charitable legacy in your will specifically calculated to meet the 10% threshold. The will can direct a fixed sum to charity or a percentage of the residue. As estate values and nil rate bands change over time, directing a percentage of the taxable residue (rather than a fixed sum) is often more reliable. Including a formula or mechanism for adjusting the charitable legacy to always reach the 10% threshold is advisable.
Build the 36% Rate Into Your Will
Including a charitable legacy calculated to meet the 10% threshold is one of the most tax-efficient estate planning strategies available — combining a genuine charitable gift with a reduced IHT rate for your family. WillSafe will kits include provisions for charitable legacies and residue gifts, ready to direct to your chosen charities.
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