‘Tis the season for giving – and saving on inheritance tax

IHT applies to gifts you make during your lifetime and after your death.  For gifts during life, the rules depend on the amount, recipient, and timing.  After death, if your estate exceeds the available allowances, IHT is charged at 40%.

Some gifts are exempt, such as anything left to a spouse, civil partner, or a charity.  And while political parties are also exempt, charities are far more common in Wills, which opens a real opportunity for tax-efficient generosity.

All gifts to UK charities (and Community Amateur Sports Clubs) are free from IHT, both lifetime donations and gifts in your Will.  Unlike other lifetime gifts, the seven-year rule doesn’t apply, and charitable gifts in a Will are excluded from the taxable value of your estate.

There’s more: leave at least 10% of your estate to charity, and the IHT rate on the remainder drops from 40% to 36%.  That’s a reduction in the overall IHT payable and a significant boost for the charities you care about.

How the reduced rate works

The reduced rate applies when your charitable gift equals 10% or more of your estate’s “baseline amount” – essentially your net estate after debts, expenses, and other reliefs, excluding the residence nil rate band.  For estates involving jointly owned assets or trusts, the calculation can get a bit trickier, which is why professional guidance is key.

A simple example

Mr Greenwoods’ estate is worth £2,000,000, split between a home (£1,000,000) and investments (£1,000,000).  Thanks to inherited allowances, he has £650,000 in ordinary nil rate bands and £350,000 in residence nil rate bands.

• Without a charitable gift:
  Taxable estate = £1,000,000 → IHT 40% = £400,000
  Children inherit = £1,600,000
• With a 10% charitable gift:
  Baseline amount = £1,350,000 → Gift to charity = £135,000
  Taxable estate after exemptions = £865,000 → IHT 36% = £311,400
  Children inherit = £1,553,600

The result?  A charity receives £135,000, children lose just £46,400, and the IHT bill is reduced by £88,600, a clear win for tax-efficient giving.

The importance of careful Will drafting

It’s really important to carefully draft your Will, as Charitable gifts can be structured in different ways:

• Conditional gifts that only apply if the reduced IHT rate is available
• Fixed sums as a fallback if conditions aren’t met
• Charitable trusts for flexibility and privacy

Because the rules are complex, especially when combined with residence nil rate bands, careful drafting is essential.  The right advice ensures your gift achieves your intentions without unintended consequences for other beneficiaries.

Thinking about giving this Christmas?  Our Private Wealth team can help you plan charitable gifts that support your loved ones, your chosen charities, and your legacy.