Can you reduce Inheritance Tax by giving to charity?
The short answer: it could make a charitable donation more tax efficient but it won't allow your family to receive more money from your estate.
What is the "charity" Inheritance Tax reduced rate?
The standard Inheritance Tax rate is 40%. It can be reduced to 36% if you leave 10% of your net estate to charity.
Your net estate is essentially the value of your estate minus any debts and your IHT tax-free allowance.
Does a lower tax rate mean more money for my family?
No – this is where things can be confusing. For each £1 you give to charity you save up to 76p in tax but still pay £1 to the charity. It's essentially a way to reduce the cost of donating to charity but you still pay part of the donation.
When is it worth making a 10% charity gift?
If your plan is already to give between 4% and 10% of your net estate to charity then pushing the gift to 10% would allow both your family and the charity to receive more money.
The table shows how much your family would receive from a £500,000 estate depending on the charity gift:
| Charity gift (%) | Charity gift (£) | Family gets |
|---|---|---|
| 0% | £0 | £430,000 |
| 4% | £7,000 | £425,800 |
| 8% | £14,000 | £421,600 |
| 10% | £17,500 | £425,800 |
Assuming a £175,000 net estate (£500,000 estate minus the £325,000 tax-free allowance)
A couple of notes:
- Your family gets the most money when you leave nothing to charity.
- Your family gets the same amount if you leave 10% instead of 4% – but the charity gets much more so it's an easy way to increase your impact.
- Your family actually receives more money if you leave 10% instead of anything above 4%. That's because the reduced rate starts at 10% and would save more in tax than the donation would cost in the 4-10% range.
Schedule 1A, Inheritance Tax Act 1984
HMRC IHTM45000: "Reduced rate for charitable gifts"
UK Government: "How Inheritance Tax works: thresholds, rules and allowances"
UK Government: "Tax relief when you donate to a charity"
