IHT Reduced Rate UK: How to Pay Inheritance Tax at 36% Instead of 40% (2026)
Leaving at least 10% of the taxable estate to charity (above the NRBs) reduces the IHT rate from 40% to 36% (s36 IHTA 1984). On a £700,000 estate, a £20,000 charitable legacy saves £15,200 in IHT — HMRC effectively contributes 76p toward every £1 donated. A deed of variation can top up a qualifying legacy within 2 years of death.
| Estate Size | Baseline | 10% Charity | IHT at 40% | IHT at 36% | IHT Saving | Net Cost of Gift |
|---|---|---|---|---|---|---|
| £600,000 — RNRB applies (home to children) | £100,000 | £10,000 | £40,000 (40%) | £32,400 (36%) | £7,600 | £2,400 net |
| £600,000 — no RNRB | £275,000 | £27,500 | £110,000 (40%) | £88,650 (36%) | £21,350 | £6,150 net |
| £800,000 — RNRB applies | £300,000 | £30,000 | £120,000 (40%) | £97,200 (36%) | £22,800 | £7,200 net |
| £500,000 — RNRB applies (at threshold) | £0 | N/A (nothing taxable) | £0 | £0 | No benefit (no taxable estate) | N/A |
| £1,000,000 — single, no RNRB | £675,000 | £67,500 | £270,000 (40%) | £218,700 (36%) | £51,300 | £16,200 net |
| £700,000 — RNRB applies | £200,000 | £20,000 | £80,000 (40%) | £64,800 (36%) | £15,200 | £4,800 net |
s36 IHTA 1984 (as amended by Finance Act 2012, Schedule 33): 36% rate where 10%+ of baseline amount to qualifying charity. Charity exemption: s23 IHTA 1984. Baseline = estate minus NRBs, RNRB, and all exemptions/reliefs. NRB: £325,000 (frozen to 2030). RNRB: £175,000 (frozen to 2030). 10% test: applies per component (general/survivorship/settled property) separately; merger election available within 2yr. Deed of variation (s142 IHTA 1984): can top up charitable legacy within 2yr of death to meet 10% threshold. IHT saving = difference between 40% and 36% rates on the remaining taxable estate. Net cost of charitable gift = gift minus IHT saving.
IHT Reduced Rate: Complete Guide
What is the IHT reduced rate and how does it work?
Section 36 IHTA 1984 (as amended by Finance Act 2012, Schedule 33) provides that if the 'appropriate proportion' of the 'baseline amount' of a component of the estate is given to qualifying charities, the IHT rate on that component is 36% instead of 40%. The 'appropriate proportion' is 10%. The 'baseline amount' is the value of the chargeable estate (after exemptions, reliefs, and the available NRBs — including the RNRB). In plain terms: if at least 10% of the taxable estate above the NRBs goes to charity in the will, IHT on the rest is charged at 36% instead of 40%. The reduced rate only applies to the chargeable element — the 10%+ charitable gift is itself exempt from IHT (s23 IHTA 1984 — charity exemption). So: the charitable donation reduces the taxable estate (IHT exempt); and the remaining chargeable estate is then taxed at 36% instead of 40%. The combined effect is significant. The IHT 'subsidy' on charitable donations: for every £1 given to charity above the 10% threshold, HMRC receives 36p less in IHT (not 40p) — and the 10% charity gift itself saves 40p/£1 in IHT (s23 exemption). HMRC effectively contributes 76p toward every £1 given to charity under this scheme — making the effective cost of the charitable gift only 24p per £1 to the remaining estate.
Calculating the 10% baseline amount — step by step
The baseline amount calculation is the key to the reduced rate: Step 1 — identify the total estate value at death (all assets, including jointly owned property and trust property in the estate). Step 2 — deduct all available exemptions and reliefs: spousal exemption (s18 IHTA); charity exemption (s23 IHTA — but this creates a circularity — see below); BPR and APR; any debts and liabilities. Step 3 — deduct the available NRBs: own NRB (£325,000); RNRB (£175,000 if applicable); any transferred NRB or RNRB from a predeceased spouse. Step 4 — the result is the 'baseline amount' for the general component. Step 5 — 10% of the baseline amount = the minimum charitable legacy to trigger the reduced rate. The circularity: the charitable gift is itself deducted from the estate (s23 exemption) before calculating the baseline amount. This creates a circularity because the charitable gift is both part of the calculation and a deduction from it. HMRC provides a standard formula to resolve the circularity. In most cases, the simple approach is: (a) calculate the taxable estate above the NRBs; (b) the charitable legacy must be at least 10/110 (approximately 9.09%) of the taxable estate including the charitable gift, or equivalently, at least 1/9 of the remaining chargeable estate (excluding the charitable gift). Practical note: for most purposes, planning for 10% of the estate above the NRBs (including the gift) will satisfy the condition — take professional advice for complex estates.
Components of the estate and the merger election
The estate is divided into three components for the purposes of the 10% test (Schedule 1A IHTA 1984, inserted by Finance Act 2012): (1) The general component — the bulk of the estate; property passing under the will or intestacy; (2) The survivorship component — assets passing to a joint owner by survivorship (e.g. jointly owned property passing automatically to the surviving owner on death — outside the estate); (3) The settled property component — property in which the deceased had an interest as trust property (e.g. an IPDI trust). The 10% test is applied to each component separately by default. This means: if the deceased has a large settled property component and a small general component, the 10% requirement must be met in each component where a reduced rate is claimed. The merger election: within 2 years of the date of death (or within 2 years of grant of probate, if later), the personal representatives can elect to merge components so that the 10% test is applied to the merged total. The merger election is advantageous where: (a) the general component alone would meet the 10% test but the settled property component would not; (b) merging allows a single charitable gift in the will to satisfy the 10% test across all components. Election: the merger election is made on the IHT100 (supplementary form) or IHT400 — take advice on the correct form. Once made, the election cannot be withdrawn.
Topping up the charitable legacy via a deed of variation
If the charitable legacy in the will falls just short of the 10% threshold, the estate can miss the reduced rate entirely — paying 40% instead of 36% IHT. The solution: a deed of variation (s142 IHTA 1984) within 2 years of the date of death. The variation is treated as if the deceased had always directed the additional charitable gift in the will — the additional gift is exempt under s23 IHTA and the 10% threshold is now met, triggering the 36% rate. Example: the will leaves £8,000 to charity on a £600,000 estate with RNRB (baseline £100,000; 10% = £10,000). The 10% threshold is not quite met (£8,000 < £10,000). Without variation: IHT at 40% on £92,000 (= £600k − £325k NRB − £175k RNRB − £8k charity) = £36,800. With deed of variation adding £2,000 more to charity (total £10,000): IHT at 36% on £90,000 = £32,400. Saving = £4,400 — achieved by adding just £2,000 more to charity. The beneficiaries lose £2,000 in inheritance but the estate saves £4,400 in IHT — a net gain to the beneficiaries of £2,400 (the excess HMRC saving minus the extra charity donation). The deed of variation must comply with s142 IHTA requirements: signed by the beneficiaries redirecting assets; within 2 years; no consideration; s142 statement.
Including the reduced rate in the will — drafting considerations
For the reduced rate to apply automatically at death (without requiring a deed of variation), the will must include a qualifying charitable legacy of at least 10% of the baseline amount. Two common drafting approaches: (1) Specific percentage clause: leave a fixed percentage (e.g. '10% of my net residuary estate') to named charities. Advantage: automatically scales to the size of the estate. Disadvantage: the specific percentage needed is '10% of the chargeable estate above the NRBs' — not 10% of the whole residue. A simple '10% of residue' clause may over-donate or under-donate depending on the estate at death; (2) Fixed sum clause: leave a fixed sum to charity. Risk: if the estate falls or rises significantly, the fixed sum may not meet the 10% threshold. Best practice: a clause drafted to give 'the minimum required to qualify for the reduced IHT rate under s36 IHTA 1984 (and Schedule 1A), being 10% of the baseline amount' — or take specialist drafting advice. The charity must be a qualifying charity: registered with HMRC as a qualifying charitable organisation (UK registered charity, Community Amateur Sports Club, or qualifying non-UK charity). Community benefit societies and certain other organisations may not qualify — check before including in the will.
Frequently Asked Questions
What is the IHT reduced rate and how do you qualify?
Section 36 IHTA 1984 reduces the IHT rate from 40% to 36% if at least 10% of the baseline amount (the taxable estate above the NRBs) is left to qualifying charities. The charitable gift is IHT-exempt (s23 IHTA 1984) and separately triggers the 36% rate on the rest. The 10% test is applied to each component of the estate (general, survivorship, settled property) separately, or to all components combined if a merger election is made within 2 years of death.
How much must I leave to charity to get the 36% IHT rate?
At least 10% of the 'baseline amount' — the net estate above the available NRBs. Example: £700,000 estate with RNRB (threshold £500,000): baseline = £700,000 minus £500,000 = £200,000. 10% of £200,000 = £20,000 to charity. IHT at 36% on remaining £180,000 = £64,800. Without charity: IHT at 40% on £200,000 = £80,000. Saving = £15,200. The effective cost of the £20,000 charitable donation to the remaining estate = only £4,800 (£20,000 minus £15,200 IHT saved). HMRC effectively contributes £15,200 of the £20,000 charitable gift.
Can I use a deed of variation to claim the 36% IHT rate?
Yes — if the will does not include a qualifying charitable legacy (or it falls short of 10%), a deed of variation (s142 IHTA 1984) within 2 years of the date of death can redirect assets to charity. The variation is treated as the deceased's gift for IHT purposes — the additional charity gift is exempt (s23 IHTA) and, if the 10% threshold is now met, the 36% rate applies to the remainder. This is particularly valuable where the charitable legacy in the will is just below the 10% threshold — a small additional gift via a deed of variation can save significantly more in IHT than its cost.
Does the 36% IHT rate apply if the estate is below the threshold?
No — the reduced rate only applies if there is a chargeable estate (estate above the NRBs). If the estate is at or below the combined NRB and RNRB (e.g. £500,000 for a single person with RNRB), the baseline amount is zero and there is no taxable estate — so the 36% rate cannot reduce anything. The 36% rate only benefits estates that would otherwise pay IHT at 40%. Where the estate is already structured to pay £0 IHT (below the threshold), charitable giving has no additional IHT benefit beyond the charitable exemption on the gift itself.
What are the estate components for the 36% IHT reduced rate?
The estate is divided into three components (Schedule 1A IHTA 1984): (1) General component: most of the estate passing under the will or intestacy; (2) Survivorship component: assets passing by right of survivorship (e.g. jointly owned property automatically passing to the surviving owner); (3) Settled property component: trust property in which the deceased had an interest. The 10% test applies to each component separately by default. A merger election (within 2 years of death) can combine components — advantageous when the charitable gift in the will meets the 10% test across the merged total but not in each component separately.
Include a 10% Charitable Legacy in Your Will
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