IHT Charitable Giving 2026/27: The 36% Reduced Rate

What Is the Reduced Rate?

Gifts to qualifying charities are already exempt from Inheritance Tax in their own right. On top of that exemption, if the charitable gift amounts to at least 10% of the deceased's net estate (calculated in a specific way described below), the rate of Inheritance Tax charged on the remaining, non-charitable, taxable part of the estate drops from the standard 40% to 36%.

The 10% Test

The test is not simply 10% of the whole estate. HMRC calculates a "baseline amount" for each component of the estate: broadly, the value that would be chargeable to Inheritance Tax after deducting the available nil rate band, reliefs and other exemptions, but before deducting the value of the charitable gift itself. The charitable gift from that component must be at least 10% of its baseline amount to unlock the reduced rate for that component.

• The general estate (assets passing under the will or intestacy)
• Jointly owned assets passing automatically by survivorship
• Assets held in trust, or gifts with reservation of benefit, that form part of the estate for IHT purposes

Estate Components and Merging

Each component is normally tested separately, but executors and personal representatives can elect to merge two or all three components together for the purposes of the calculation. Merging can help when charitable giving is concentrated in the general estate (through the will) but the deceased also held jointly owned property that would otherwise fail its own 10% test on its own.

Because merging changes the overall baseline amount and therefore how much needs to be given to qualify, the decision should be worked through carefully with the figures for the specific estate, usually with professional support from the solicitor or accountant handling the estate administration.

Planning in Your Will

Because asset values, reliefs and the nil rate band can change between writing a will and death, many wills use a formula clause — for example, "10% of my baseline amount" — rather than a fixed sum, so the gift automatically recalculates to hit the threshold at the point it actually matters. Where a will was drafted without this in mind, beneficiaries can sometimes use a deed of variation within two years of death to redirect part of their inheritance to charity and bring the estate above the 10% threshold retrospectively.

Worked Example

Margaret's estate is worth £900,000. After deducting her £325,000 nil rate band and £175,000 residence nil rate band, her baseline amount for the general estate is £400,000. To qualify for the 36% reduced rate, she needs to leave at least £40,000 (10% of £400,000) to charity from that component.

Her will leaves £50,000 to a cancer research charity, comfortably clearing the £40,000 threshold. The remaining £350,000 of her taxable estate is then charged at 36% instead of 40%, an Inheritance Tax saving of £14,000 (4% of £350,000) compared with leaving the same £50,000 to charity without otherwise structuring the gift to hit the 10% test.

Common Pitfalls

• Using a fixed sum instead of a formula. A fixed cash legacy can fall just short of 10% if the estate's value or the available nil rate band changes before death.
• Testing the wrong component. Applying the 10% test to the whole estate rather than the correct baseline amount for each component leads to incorrect calculations.
• Missing the merging election where it would help. Failing to elect to merge components can mean missing the reduced rate on a technicality, even where enough was given to charity overall.
• Assuming any charity qualifies. The recipient must meet the legal definition of a qualifying charity for Inheritance Tax purposes; check the charity is properly registered.
• Not using a deed of variation when close to the threshold. Beneficiaries sometimes miss the two-year window to redirect a small extra amount to charity that would have secured the reduced rate for the whole estate.