Private Client
Charitable Donation and Inheritance Tax Relief
Jessica Partridge
|
10th July 2025
A little-known but highly valuable Inheritance Tax (IHT) relief exists when charitable donations are made from an estate. Rather than being a tax that is paid, this relief actually reduces the overall rate of IHT paid on the remainder of the estate, potentially benefiting both the charity and other beneficiaries.
The Reduced Inheritance Tax Rate for Charitable Donations
Normally, Inheritance Tax is charged at 40% on the value of an estate above the available nil-rate band. However, if at least 10% of the net estate is left to charity, the rate of Inheritance Tax on the remaining estate is reduced to 36%.
Key Rules
- The ‘net estate’ is calculated after deducting liabilities, exemptions, and the nil-rate band.
- The 10% charitable gift is calculated separately for different parts (‘components’) of the estate.
- Executors can make elections to merge components for simplicity.
Example
An estate worth £1.5 million:
- Nil-rate band: £325,000
- Taxable estate: £1,175,000
- If at least £117,500 (10%) is donated to charity, the IHT rate on the remaining £1,057,500 is reduced from 40% to 36%, resulting in tax savings.
Comparison: With vs Without Charitable Gift
| No Charity Gift | 10% to Charity | |
|---|---|---|
| Taxable Estate | £1,000,000 | £1,000,000 |
| Charity Gift | £0 | £100,000 |
| Taxable After Gift | £1,000,000 | £900,000 |
| IHT Rate | 40% | 36% |
| IHT Payable | £400,000 | £324,000 |
| Net to Other Heirs | £600,000 | £576,000 |
| Effective Cost of Gift | £0 | £24,000 |
How to Arrange This
- Include the gift in your Will, clearly stating the amount or percentage.
- Ensure the charity is a UK-registered charity.
- Speak to a solicitor or estate planner to calculate the 10% threshold correctly.
- Executors can sometimes vary the Will after death to enable this relief via a Deed of Variation.