Gifts to Charity & the 36% Rate

Key facts

Gifts to UK-registered charities are fully exempt from IHT (lifetime and on death).
Leaving at least 10% of the net estate to charity reduces the IHT rate from 40% to 36%.
The 36% rate applies to the estate after deducting the NRB, RNRB, and the charitable gifts themselves.
The reduced rate can make leaving more to charity cost less than it might appear.
The 10% threshold is calculated separately for each “component” of the estate (settled property, joint property, free estate).

Charity Exemption

Gifts to UK-registered charities are completely exempt from Inheritance Tax. This applies to both gifts made during your lifetime and gifts left in your will. There is no limit on the amount you can give to charity free of IHT.^[3]

Charitable gifts are deducted from the estate before IHT is calculated, reducing both the taxable estate and potentially qualifying the remaining estate for the reduced 36% rate.

The Reduced 36% Rate

Since April 2012, if at least 10% of the “baseline amount” of the estate is left to charity, the IHT rate on the non-charity portion drops from 40% to 36%.^[1]

The baseline amount is broadly:

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

Worked Example

Item	Without Charity Gift	With 10% Charity Gift
Net estate	£525,000	£525,000
Less NRB	−£325,000	−£325,000
Baseline amount	£200,000	£200,000
Charitable gift (10% of baseline)	£0	−£20,000
Taxable estate	£200,000	£180,000
IHT rate	40%	36%
IHT payable	£80,000	£64,800
To charity	£0	£20,000
To beneficiaries	£445,000	£440,200

In this example, leaving £20,000 to charity only reduces the beneficiaries’ inheritance by £4,800 (not £20,000), because of the lower tax rate. The charity receives £20,000 at a real cost of £4,800 to the family.

The “sweet spot”: In some cases, leaving slightly more to charity can actually increase what the family receives. This happens when the tax saving from moving to 36% 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
Joint property — assets passing by survivorship
Settled property — trust assets in which the deceased had an interest

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

Opting Out

The reduced rate applies automatically if the conditions are met. However, beneficiaries can elect to opt out of the reduced rate if they wish (for example, if the charity wishes to receive a larger gift instead of the tax saving going to the family).^[2]

Frequently Asked Questions

How does the 36% reduced rate work?

If you leave at least 10% of your “baseline amount” (broadly, the net estate after the NRB and exemptions) to charity, the IHT rate on the remainder drops from 40% to 36%. This 4% saving can sometimes mean the beneficiaries receive more even though more is left 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. They also do not use up any of your nil-rate band.

Can I choose any charity?

The charity must be recognised by HMRC for tax purposes. This includes UK-registered charities, community amateur sports clubs (CASCs), and certain overseas charities meeting UK standards. The charity must meet the conditions at the time the gift takes effect.

Sources

Inheritance Tax: reduced rate with charity donations — GOV.UK
IHTM45001 – Reduced rate of IHT — HMRC
Inheritance Tax: gifts to charities — GOV.UK