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Charity Exemption

Also known as: Charitable Gifts IHT Relief, Charitable Donations Tax Exemption

Definition

Charity exemption is an inheritance tax relief that makes gifts to UK registered charities completely tax-free and can reduce the tax rate on the rest of your estate from 40% to 36%.

This powerful combination of complete tax exemption and reduced rates makes charitable giving one of the most effective inheritance tax planning strategies available in the UK.

What Does Charity Exemption Mean?

Under Section 23 of the Inheritance Tax Act 1984, gifts to UK registered charities are completely exempt from inheritance tax, with no limit on the amount. This exemption applies to both lifetime gifts and gifts made through your will. The property must become the property of charities or be held on trust for charitable purposes only. Since April 2024, following significant legislative changes, only UK registered charities qualify for this exemption—gifts to overseas charities, including those in the EU and EEA, no longer receive tax relief.

The charity exemption works in two distinct ways. First, any gift to a qualifying UK charity is completely exempt from inheritance tax regardless of its value. Second, if you leave at least 10% of your net estate to charity, the inheritance tax rate on the remaining taxable estate drops from the standard 40% to 36%. This reduced rate was introduced in April 2012 under Schedule 1A of the Inheritance Tax Act 1984 and creates a unique opportunity where your family can receive almost the same amount while charity benefits significantly.

To qualify for the 36% reduced rate, you must leave at least 10% of your "baseline amount" to charity. The baseline amount is your net estate (after debts and funeral costs) minus the £325,000 nil rate band, but not minus the residence nil rate band. For example, James has an estate worth £600,000. After deducting the £325,000 nil rate band, his baseline amount is £275,000. To qualify for the 36% rate, he needs to leave at least £27,500 (10% of £275,000) to charity. If he leaves £30,000 to Cancer Research UK, his remaining £245,000 taxable estate is taxed at 36% (£88,200) instead of 40% (£98,000). His children receive £481,800, just £8,200 less than without any charitable gift, while Cancer Research UK receives £30,000.

A common error occurs when wills state "10% of my residuary estate to charity." If your estate includes substantial specific legacies, 10% of the residue might not meet the 10% baseline threshold. For instance, Patricia's £800,000 estate includes £400,000 in specific legacies to family members. Her residuary estate is £400,000, so 10% to charity is £40,000. However, her baseline amount is £475,000 (£800,000 minus £325,000 nil rate band), meaning she needs £47,500 (10% of baseline) to qualify for the reduced rate. Her £40,000 charitable gift falls short, so her estate pays tax at 40% instead of 36%—a costly drafting mistake.

Important considerations include verifying charity registration status with the Charity Commission using their registered charity number, understanding that conditional gifts only qualify if the condition is satisfied within 12 months, and reviewing your will if it includes gifts to overseas charities made before the April 2024 changes. Executors can also use a Deed of Variation within two years of death to add or increase charitable legacies to achieve the 36% rate, even if not included in the original will.

Common Questions

"How much can I leave to charity without paying inheritance tax?" There is no limit—any amount left to a UK registered charity is completely exempt from inheritance tax. You can leave your entire estate to charity tax-free if you wish, though most people balance charitable giving with family provision.

"What is the 10% charity rule for inheritance tax?" If you leave at least 10% of your baseline amount (net estate minus the nil rate band) to UK registered charities, the inheritance tax rate on the rest of your taxable estate reduces from 40% to 36%, saving your estate 10% in tax on the remaining value.

"Can I leave money to overseas charities in my will?" Since April 2024, only UK registered charities qualify for inheritance tax exemption. Gifts to overseas charities, including those in the EU and EEA, are no longer exempt and will be included in your taxable estate, even if your will was written before these changes.

Common Misconceptions

Myth: Leaving 10% to charity means my family gets 10% less

Reality: Due to the reduced 36% tax rate, your family often receives nearly the same amount. In many scenarios, the tax saving from the reduced rate means your family receives only 2-4% less while charity receives 10%, because the government receives less in tax.

Myth: The 10% is calculated on my total estate value

Reality: The 10% threshold is calculated on your baseline amount—your net estate after deducting debts and the £325,000 nil rate band, but before deducting the residence nil rate band. This distinction is critical for qualifying for the 36% rate and is frequently misunderstood.

Understanding charity exemption connects to these related concepts:

  • Inheritance Tax: Charity exemption is one of the most valuable reliefs available for reducing inheritance tax liability on estates above the nil rate band.
  • 36% IHT Rate: The reduced inheritance tax rate that applies when you leave at least 10% of your baseline amount to qualifying UK charities.
  • Charitable Legacy: A gift to charity specified in your will that benefits from the charity exemption and may contribute to the 10% threshold for the reduced rate.
  • Beneficiary: People or organisations named in your will to receive assets, including both charitable and non-charitable beneficiaries who may benefit from the reduced tax rate.

Need Help with Your Will?

Including charitable gifts in your will can reduce inheritance tax while supporting causes you care about. The 36% reduced rate opportunity means your family receives nearly the same amount while charity benefits significantly.

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Legal Disclaimer: This glossary entry provides general information about charity exemption and inheritance tax and does not constitute legal or tax advice. Inheritance tax calculations can be complex and depend on your individual circumstances. For advice specific to your situation, consult a qualified solicitor or tax adviser.