Charity Exemption & 36% Rate

Key facts

Gifts to UK-registered charities are fully exempt from IHT, whether made during lifetime or on death.
Leaving at least 10% of the “baseline amount” to charity reduces the IHT rate from 40% to 36%.
The 10% test is applied separately to each component of the estate (free estate, joint property, settled property).
The reduced rate has been available since April 2012 (introduced by Finance Act 2012).
Personal representatives can elect to merge estate components to help meet the 10% threshold.

The Charity Exemption

Any gift to a qualifying UK-registered charity is completely exempt from Inheritance Tax, with no upper limit. This applies to gifts made during your lifetime (which are exempt transfers, not PETs or CLTs) and to gifts left in your will.^[1]

The charity exemption is one of the most powerful IHT reliefs available. Unlike many other reliefs, there is no cap on the amount, no minimum holding period, and no restriction on the type of asset gifted.

Key point: Charitable gifts are deducted from the estate before IHT is calculated. This means they reduce both the taxable estate and potentially qualify the remaining estate for the reduced 36% rate.

Qualifying Charities

To qualify for the exemption, the recipient must be:^[3]

A UK-registered charity recognised by HMRC for tax purposes
A community amateur sports club (CASC) registered with HMRC
Certain national institutions (museums, galleries, the National Trust, universities)
Qualifying overseas charities that meet UK standards
Political parties meeting specific conditions (at least two MPs, or one MP and 150,000 votes)

The Reduced 36% Rate

Since April 2012, estates that leave at least 10% of the “baseline amount” to charity benefit from a reduced IHT rate of 36% instead of the standard 40%.^[1]

The baseline amount is broadly calculated as:

The value of the estate (or relevant component)
Less the nil-rate band (NRB) and residence nil-rate band (RNRB)
Less any reliefs (BPR, APR) and exemptions (excluding the charitable gift itself)

Worked Example

Item	Without Charity Gift	With 10% Charity Gift
Net estate	£825,000	£825,000
Less NRB	−£325,000	−£325,000
Baseline amount	£500,000	£500,000
Charitable gift (10% of baseline)	£0	−£50,000
Taxable estate	£500,000	£450,000
IHT rate	40%	36%
IHT payable	£200,000	£162,000
To charity	£0	£50,000
To beneficiaries	£625,000	£613,000

In this example, leaving £50,000 to charity only reduces the beneficiaries’ inheritance by £12,000 — not £50,000 — because of the lower tax rate.

The “sweet spot”: For some estates, leaving slightly more to charity can actually increase what the family receives. This occurs when the tax saving from the 36% rate exceeds the additional charitable gift. It is always worth running the numbers.

The Component Calculation

The 10% test is applied separately to each “component” of the estate:^[2]

The free estate — assets passing under the will or intestacy rules
Joint property — assets passing by survivorship
Settled property — trust assets in which the deceased had an interest in possession

Each component must independently meet the 10% threshold. However, the personal representatives can elect to merge components if this allows the 36% rate to apply where it otherwise would not.

Practical Tips

Specify in your will that the charitable legacy should be “at least 10% of the baseline amount” to ensure the 36% rate applies even if estate values change
Consider a flexible charitable legacy that allows executors to adjust the amount
Remember that the exemption covers gifts of any asset, not just cash — you can leave property, shares, or personal items to charity
Lifetime charitable gifts also qualify for income tax relief (Gift Aid), giving a double benefit

Frequently Asked Questions

How does the 36% reduced rate work?

If you leave at least 10% of the “baseline amount” (broadly, the net estate minus the NRB and other exemptions) to charity, the IHT rate on the taxable remainder drops from 40% to 36%. The 4% saving can sometimes mean beneficiaries receive more even though more is given to charity.

Does the charity exemption apply to lifetime gifts?

Yes. Lifetime gifts to UK-registered charities are completely exempt from IHT. They are not PETs or CLTs — they are exempt transfers and do not use up any of your nil-rate band.

Can I leave money to any charity?

The recipient must be a UK-registered charity recognised by HMRC, a community amateur sports club (CASC), or certain overseas charities meeting UK standards. The charity must meet the conditions at the time the gift takes effect.

Can the 36% rate save beneficiaries money?

Yes. In many cases, the 4% rate reduction saves more in IHT than the additional charitable gift costs. For some estates there is a “sweet spot” where leaving slightly more to charity actually increases what the family receives.

Sources

Inheritance Tax: reduced rate with charity donations — GOV.UK
IHTM45001 – Reduced rate of IHT — HMRC
Charities and tax: overview — GOV.UK