Leave 10% to charity and your inheritance tax rate drops from 40% to 36%: how the reduced rate actually works

If you leave at least 10% of your estate to charity, the inheritance tax rate on the rest of your estate drops from 40% to 36%. For some families, that 4-point reduction means the charitable gift effectively costs the other heirs far less than the gift itself.

This guide explains how the reduced rate actually works, why the maths is not as simple as it looks, and when it makes sense (and when it does not).

The basic rule

The inheritance tax main rate is 40%, applied to the value of your estate above the nil-rate band thresholds. A reduced rate of 36% applies if you leave at least 10% of your 'baseline amount' to qualifying charities.

The reduced rate applies to the entire taxable estate (excluding the charitable gift), not just to the portion above the 10% threshold. That is why the rule produces an unusual incentive: pushing a smaller charitable gift up to the 10% line can move the entire estate from 40% to 36%.

The baseline amount

The baseline amount is the figure the 10% is measured against. It is essentially your taxable estate after deducting the nil-rate band, the residence nil-rate band (if applicable), debts, and any reliefs (such as business property relief). It is not the same as your total estate.

In practice, this means a small estate may not benefit much from the reduced rate even with a 10% gift, because the baseline is small. A larger estate where most of the value is above the thresholds is where the 36% rate gets interesting.

A worked example

Margaret has an estate of £1.5 million. As a widow whose late husband's nil-rate bands transferred to her, she has a combined inheritance tax threshold of £1 million (£650,000 of nil-rate band and £350,000 of residence nil-rate band, assuming her home is left to her children). Her taxable estate is therefore £500,000.

Without a charitable gift

At the standard rate of 40%, the inheritance tax on £500,000 is £200,000. Margaret's heirs receive £1.5 million minus £200,000, or £1.3 million in total.

With a 10% charitable gift

Margaret leaves 10% of her baseline amount (the £500,000 taxable portion) to charity. That gift is £50,000.

The remaining taxable estate is £450,000. The reduced 36% rate applies to that amount, generating inheritance tax of £162,000.

Total leaving the estate: £50,000 to charity plus £162,000 in inheritance tax, a total of £212,000.

Heirs receive £1.5 million minus £212,000, or £1,288,000.

The headline number

In this example, the charity receives £50,000. The cost to the heirs of making that gift is £12,000 (the difference between £1.3 million and £1,288,000). The remaining £38,000 of the charitable gift is effectively funded by the reduced tax bill.

This is the structural reason the 36% rate is attractive for estates well over the nil-rate band: a meaningful charitable gift can be made with most of the cost coming out of what would otherwise have been inheritance tax.

Getting the will wording right

The reduced rate only applies if the 10% test is met. The test is mechanical and the calculation has specific rules. Getting the will wording right matters.

A clause that gifts a specific cash sum to charity may, by accident, fall just short of the 10% threshold if the estate value moves between drafting and death. A clause that gifts a defined percentage of the baseline amount automatically tracks the threshold and qualifies for the reduced rate regardless of the estate value at death.

HMRC publishes guidance on the calculation, and many wills now include a 'qualifying charity clause' designed to top up the gift automatically to the level needed to qualify if it would otherwise fall short.

This is one of the cases where a proper will-drafting service earns its fee. The reduced rate is worth tens of thousands of pounds on a meaningful estate, and the wording is unforgiving.

Combining the reduced rate with other planning

The 36% rate sits alongside the other inheritance tax tools rather than replacing them. It is most powerful when combined with:

• Lifetime gifting under the seven-year rule, which reduces the size of the taxable estate before the 10% test is applied
• Trust planning, which can move further assets outside the estate over time
• Pension planning, which from April 2027 is changing significantly as most unused pensions are expected to fall within the estate

The starting point for any of this is a clear picture of where the estate sits against the nil-rate band thresholds. There is no point planning for the 36% rate if the estate is already comfortably below the thresholds anyway.

When the 36% rate makes sense

The reduced rate is genuinely useful when:

• The estate is comfortably above the nil-rate band thresholds, so there is a meaningful taxable portion
• The testator has a real charitable intention and would have made some gift anyway
• The heirs accept that the 4-point rate cut can stretch the gift, but only stretches it; it is not a free gift

When it does not

The reduced rate is not always the right answer:

• Where the estate is at or just above the threshold, the baseline amount may be too small to make the 10% gift worthwhile
• Where there is no charitable intention at all, a gift made purely to game the rate is unlikely to feel right to anyone involved
• Where there are competing claims on the estate (children, vulnerable beneficiaries), a 10% charitable gift may push the family below what they actually need

A note on choosing the charity

Gifts to UK-registered charities qualify for the exemption. Gifts to charities in some EEA countries and certain other jurisdictions may also qualify under specific rules. Picking a recognised charity and identifying it precisely in the will (including registration number) avoids disputes at probate.

Simply Estate is an estate planning firm. Our team can model the reduced rate against your specific estate and draft the will wording to qualify. Visit our inheritance tax planning page to book a free, no-obligation review.