Charitable Giving, Philanthropy & IHT
The IHT charity exemption allows gifts made to UK-registered charities to be completely free from Inheritance Tax.
Donations made during your lifetime or through your Will are exempt, and if at least 10% of your estate is left to charity, the remaining estate may qualify for a reduced IHT rate of 36% instead of 40%.
In planning your estate or lifetime giving, understanding the IHT charity exemption is crucial. Gifts and legacies to qualifying charities can avoid Inheritance Tax (IHT) altogether, and in certain circumstances reduce the rate of IHT on the rest of your estate from 40% to 36%. This page combines the relevant law, HMRC rules, planning considerations, worked examples, pitfalls and how Naail & Co can support you.
The IHT charity exemption is the principle that gifts (lifetime or on death) to qualifying charities are exempt from IHT.
Thus, a gift to a charity does not count as part of the taxable estate for IHT.
Moreover, under certain conditions, leaving sufficient value to charity can trigger a reduced IHT rate (36%) on the balance of the estate (versus the standard 40%).
This exemption is governed by Inheritance Tax Act 1984 (IHTA 1984) and HMRC’s Inheritance Tax Manual (e.g. IHTM11101, IHTM45031).
HMRC’s rules define “charity” for IHT purposes in line with charitable status under the Taxes Act and court definitions. (GOV.UK)
Community Amateur Sports Clubs (CASCs) also qualify as “charities” for IHT purposes when registered and meeting HMRC requirements.
The charity must be established for charitable purposes only, with suitable governance and managers. (GOV.UK)
From 15 March 2023 (with full effect from 1 April 2024), HMRC restricted charitable IHT reliefs (including the IHT charity exemption and the 36% reduced rate) to UK charities and UK CASCs.
Donations to EU / EEA charities will generally no longer qualify unless those entities are registered/recognized in the UK under transitional rules.
This change means legacy clauses referencing overseas charities should be reviewed and potentially amended.
Executors and donors should confirm that the recipient is recognized by HMRC post-implementation.
Before relying on the IHT charity exemption, confirm that the charity is on the HMRC list of recognized charities (or CASC list) and that it meets ongoing governance criteria.
If in doubt, obtain a written confirmation from the charity or professional advice.
Gifts made during lifetime (inter vivos) to qualifying charities are fully exempt from IHT and are not subject to the 7-year rule that applies to gifts to non-charities.
That means you can make large donations during your life, and they fall entirely outside the IHT calculation.
These charitable gifts are separate from other IHT reliefs (e.g. the annual exemption, small gifts, normal expenditure out of income) and do not “use up” those allowances.
The “normal expenditure out of income” exemption (under section 21 IHTA 1984) allows regular gifts made from surplus income to be immediately outside your estate, if conditions are met.
But the IHT charity exemption is more powerful as there is no upper limit in principle.
Keep documentation: dated gift records, correspondence with the charity, evidence of payment, and proof of charity status.
This helps executors and HMRC confirm that the gift qualifies for exemption.
When you leave a legacy (specific gift, pecuniary gift, or share of residue) to a charity in your Will, that legacy is deducted from your taxable estate before IHT is calculated.
The Will must correctly identify the charity (name, registration number) to avoid ambiguity and risk.
Consider fallback clauses (alternate charities) in case a named charity ceases or loses status.
Charitable legacies are applied before the estate is taxed, effectively reducing the value subject to IHT.
For the 36% reduced rate test (see next section), the timing and drafting of legacies matter.
If at least 10% of your baseline amount is left to a qualifying charity, the rate of IHT on the rest of your chargeable estate can drop from 40% to 36%. (GOV.UK)
The charitable gift itself remains exempt.
This rule has applied for deaths on or after 6 April 2012. (GOV.UK)
Baseline amount is not simply the residuary estate; it is calculated under IHTA 1984, Sch 1A, by reference to each component of the estate (general, survivorship, settled property). (GOV.UK)
Steps (per guidance) include:
1. Value the chargeable transfer for each component (excluding charitable legacy)
2. Deduct the apportioned nil-rate band for that component
3. Add back the charitable legacy
→ that gives the baseline amount for that component.
The charitable gift must equal (or exceed) 10% of that baseline amount for the component to qualify for the 36% rate. (GOV.UK)
The estate is divided into three components (unless merged):
- General component (solely owned & tenants in common assets)
- Survivorship component (joint assets passing by survivorship)
- Settled property component (assets in trust) (GOV.UK)
The 36% rate applies component by component — some components may qualify, others may not. (GOV.UK)
Executors may elect within two years to merge components, which can allow a broader portion of estate to benefit from 36%, if charitable giving is sufficient. (GOV.UK)
To claim the reduced 36% rate, executors must submit Schedule IHT430, which provides for merging components, opting out, and applying 36%. (GOV.UK)
The election (merge or opt-out) must be made within two years of the date of death. (GOV.UK)
Proper signatures and authority from all “appropriate persons” (those liable to pay IHT in each component) are required. (GOV.UK)
Example (simple single-component case):
Suppose a person’s estate (after debts) is £1,000,000, and no lifetime gifts.
Nil-rate band is £325,000 (and no residence nil-rate band for simplicity).
A legacy of £70,000 is left to a qualifying charity.
Baseline amount = (Value of estate less debts less nil rate band) + charitable legacy = (1,000,000 − 0 − 325,000) + 70,000 = £745,000.
10% threshold = £74,500. Because the £70,000 gift is slightly under 10%, the estate does not qualify for 36%.
If the gift were £75,000, then 36% could apply on the remainder.
The benefit: tax payable = (Baseline minus charity) × 36% ≈ (745,000 − 75,000) × 36% = £240,000 (versus 40% on 670,000 = £268,000).
IHT saved = ~£28,000.
Beneficiaries under a Will can execute a Deed of Variation (within 2 years of death) to redirect their inheritance (or part) to a charity.
The effect is treated as if the deceased had made the gift in the Will, meaning it can qualify for the IHT charity exemption and count toward the 10% test. (GOV.UK)
The deed must be legal, properly drafted, and signed by those affected.
The charity must accept the gift under the Deed.
All parties with an interest must consent.
The deed should specify that the gift is to qualify for reduced rate if relevant.
Note: if the donation is used to push a component over the 10% threshold, it may enable 36% IHT treatment.
Suppose a non-charitable beneficiary is due to inherit £200,000, but the estate initially doesn’t hit the 10% test.
By directing £25,000 of that to a UK charity via Deed of Variation, the charitable percentage may cross the 10% line, enabling the 36% rate on the rest of that component.
The timing and formalities (within 2 years) are critical.
Some assets may be held in trusts at death, or a Will might create trusts for beneficiaries.
For trust assets, distributions to charity within 2 years of death can sometimes trigger the reduced rate or exemption treatment.
However, special rules apply to interest-in-possession trusts, discretionary trusts, and settled property components (component analysis as above).
The alignment of the 2-year period, the exercise of trustees’ powers, and whether the gift counts in the relevant component are delicate.
Failure to act in time may forfeit the opportunity to leverage the IHT charity exemption or 36% rate for trust assets.
Charitable giving under Gift Aid provides income tax relief (for individuals) but does not in itself affect IHT relief. They are distinct regimes.
A gift during lifetime could benefit from both Gift Aid (if eligible) and the IHT charity exemption.
Ensuring dual treatment requires proper documentation and declarations.
When you donate property (e.g. land, shares) to a charity, CGT may be relieved (i.e. no capital gains liability).
That means the charity receives the full value and the gift qualifies in IHT terms too.
As noted above, since restrictions to UK-only charities came into force, gifts to overseas charities are generally disqualified for IHT charity relief or the reduced 36% rate.
Wills drafted years ago naming EU charities should be re-examined.
Where a donor has reliefs like business property relief, agricultural relief, or the residence nil-rate band, these must be factored in when calculating the baseline amount for the 10% charitable threshold. (Foot Anstey)
Ensure that charitable legacies are not drafting in a way that subverts or interacts badly with other reliefs.
Incorrect or ambiguous Will wording (e.g. “10% of the estate” rather than 10% of baseline) — HMRC may reject the 10% test. (GOV.UK)
Failure to use IHT430 or missing the two-year window for merging components or claiming.
Naming charities that do not qualify or lose status post-change (especially non-UK entities).
Component splits causing the charitable gift not to meet 10% in one component.
Inadequate recordkeeping or proof of gift, jeopardising HMRC acceptance.
Delay in trustee action with trusts beyond allowable time.
Incorrect apportionment of nil-rate band or mis-calculation of baseline amount.
To mitigate, always use clear drafting (e.g. “charitable legacy equal to 10% of baseline amount (such baseline amount as defined in IHTA 1984 Sch 1A)”), obtain professional review, and maintain full documentation.
At death, executors prepare IHT400, IHT403 (gifts schedule), and Schedule IHT430 (if claiming reduced rate or merging) as required. (GOV.UK)
Charity legacies must be reflected in the IHT400 schedule of deductions. (GOV.UK)
Maintain: valuations, accounts, proof of gift, charity confirmation of status, correspondence.
HMRC may open enquiries into the 10% test and component apportionments—well-documented methodology helps.
If forms or elections are late or incorrectly signed, opportunities may be lost.
UK-only charity rule (implemented from 2023/2024) – a major planning risk for any donor or will referencing overseas charities.
Review existing wills and legacy provisions in light of this change.
Anticipate possible future policy shifts affecting charitable reliefs (given scrutiny).
Periodic reviews – especially when significant legal or financial changes occur.
Will drafting & review: we ensure your Will uses correct, future-proof clauses (e.g. referencing baseline, fallback charity, addressing component splits).
Charity status check: we confirm that your chosen charities qualify for IHT purposes under current rules.
Component analysis & election advice: we advise on when to merge components or opt in/out via IHT430.
Deed of Variation assistance: drafting, execution, and advice to make post-death gifts qualify.
Trust planning & distributions: structuring trust distributions to align with reduced rate eligibility.
HMRC liaison & executor support: we prepare IHT400, IHT430 forms, supporting schedules, documentation and defend the strategy if HMRC enquires.
Ongoing review: adapt your legacy strategy over time, especially as laws (e.g. charity recognition rules) change.
Contact Naail & Co today for a tailored review of your Will, estate plan or philanthropic giving strategy to maximise the IHT charity exemption and ensure reduced IHT treatment for your beneficiaries and charitable objectives.
The IHT charity exemption is a rule that allows gifts made to UK-registered charities to be completely free from Inheritance Tax (IHT). Whether the gift is made during your lifetime or through your Will, it does not count as part of your taxable estate.
No — only UK-registered charities and Community Amateur Sports Clubs (CASCs) that meet HMRC’s definition of charitable status qualify for the IHT charity exemption. Since March 2023, most EU and overseas charities are no longer eligible for IHT reliefs.
If at least 10% of the net baseline amount of your estate is left to a UK charity, the IHT rate on the remainder of your estate drops from 40% to 36%. This is known as the IHT reduced rate and can save thousands in tax while supporting good causes.
Yes. If beneficiaries sign a Deed of Variation within two years of death redirecting part of their inheritance to a charity, HMRC treats it as if the deceased had made the gift. This allows the estate to benefit from the IHT charity exemption and possibly the 36% rate.
Charitable gifts work alongside other IHT reliefs, such as business property relief or the residence nil-rate band. However, these must be considered carefully when calculating whether your gift meets the 10% threshold for the IHT charity exemption.
Yes. Trusts and settled property can qualify for the IHT charity exemption if trustees transfer assets to a UK-registered charity, often within two years of death. However, timing and component rules are complex and require professional advice.
Any lifetime gifts to a qualifying UK charity are fully exempt from IHT and are not subject to the 7-year rule that applies to gifts to individuals. This means donations made while you are alive immediately fall outside your estate for inheritance tax purposes.
Yes. Gifts left to a qualifying charity in your Will or codicil are exempt from inheritance tax. Executors deduct the charitable gifts before calculating the taxable value of your estate, potentially lowering the total IHT payable.
The baseline amount is the value of your estate after deducting the nil-rate band and certain reliefs, but before deducting the charitable gift. If the charity receives at least 10% of that baseline amount, your estate qualifies for the 36% reduced rate.
In most cases, no. Since the law change effective 15 March 2023 (fully implemented April 2024), only UK-based charities and CASCs are eligible for the IHT charity exemption and reduced 36% rate. Gifts to foreign charities generally no longer qualify.
Executors should provide full records, including charity details, donation receipts, and proof of status, when submitting IHT400 and IHT430 forms to HMRC. Proper documentation ensures the charitable gifts are recognised for the exemption or reduced rate.
Naail & Co Chartered Certified Accountants & Tax Advisors specialise in estate planning, charitable giving, and inheritance tax reliefs. We help clients structure wills, trusts, and legacies to maximise the IHT charity exemption and secure the 36% reduced rate — while fulfilling their philanthropic goals.
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