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Reduced IHT Rate (36%)

Also known as: Charitable Donations Rate, 36% Rate

Definition

The reduced IHT rate is a lower inheritance tax rate of 36% (instead of 40%) that applies when you leave at least 10% of your baseline estate to qualifying UK charities.

This government incentive effectively shares the cost of charitable giving between HMRC and your beneficiaries, creating a win-win situation where charities benefit while your family pays less tax than you might expect.

What Does Reduced IHT Rate (36%) Mean?

Introduced through the Finance Act 2012 and effective for deaths on or after 6 April 2012, the reduced IHT rate lowers inheritance tax from the standard 40% to 36% when you meet the charitable giving condition under the Inheritance Tax Act 1984, Schedule 1A. To qualify, you must leave at least 10% of your baseline amount to UK-registered charities. Since Finance Act 2023 (effective 15 March 2023), only UK charities qualify for this relief, with limited transitional provisions for charities with prior HMRC agreements.

The baseline amount is a specific technical calculation that differs from both your gross estate and your final taxable amount. Start with your estate value, deduct any debts and funeral expenses, subtract gifts to your spouse or civil partner (which are exempt), then deduct your nil rate band (£325,000) and any transferable nil rate band. Crucially, you do not deduct the residence nil rate band when calculating the baseline. This common error causes many estates to fail qualification. The resulting figure is your baseline amount, and 10% of this must go to charity to access the 36% rate on the remaining taxable estate.

Consider Emma, who dies in 2024 with an £850,000 estate and no transferable nil rate band. Her baseline calculation: £850,000 minus £8,000 funeral expenses equals £842,000, then minus £325,000 nil rate band equals a baseline of £517,000. She needs to leave £51,700 (10% of £517,000) to charity to qualify. Emma leaves £55,000 to Cancer Research UK and the residue to her two children. Without the charitable gift, her estate would pay £342,000 × 40% = £136,800 in tax (after deducting the £175,000 residence nil rate band). With the charitable gift and reduced rate, the taxable amount becomes £290,000 × 36% = £104,400. The tax saving of £32,400 means her children effectively lose only £22,600 from their inheritance while Cancer Research receives £55,000. The government contributes £32,400 toward the charitable gift through reduced tax.

This counterintuitive benefit surprises most people. When you leave 10% to charity, your beneficiaries do not lose the full 10% because the 4% tax reduction partially offsets the gift. The estate must be properly structured through careful will drafting or implemented after death via a Deed of Variation within two years. HMRC provides Form IHT430 and an online calculator to help executors determine if the charitable giving condition is met. Professional advice is strongly recommended because small drafting errors can disqualify an estate from tens of thousands in tax savings.

Common Questions

"If I leave 10% of my estate to charity, will my family actually lose that full 10%?"

No. When you leave 10% to charity, the inheritance tax rate drops from 40% to 36% on the remaining estate. This 4% tax saving partially offsets the charitable gift, meaning your beneficiaries lose significantly less than the full 10%. The effective cost to your family is typically 6-7% of your estate, not 10%.

"Does the 10% have to be calculated based on my total estate value or just the part that's taxable?"

It is based on your baseline amount, which is the taxable estate after deducting the nil rate band and transferable nil rate band but before deducting the residence nil rate band. This is neither your total estate nor your final taxable amount. The 10% must be calculated from this specific baseline figure to qualify for the reduced rate.

"Can I add a charitable gift to my late father's estate even though he didn't mention charity in his will?"

Yes, through a Deed of Variation executed within two years of death. The beneficiaries named in the will can agree to redirect part of their inheritance to charity. If this brings the charitable gift to 10% or more of the baseline amount, the estate qualifies for the 36% rate retroactively, potentially saving significant inheritance tax.

Common Misconceptions

Myth: Leaving 10% to charity means my children will receive 10% less.

Reality: When you leave 10% to charity, your children do not lose the full 10% because the inheritance tax rate drops from 40% to 36%. This 4% tax saving partially offsets the charitable gift. In practice, if you leave £50,000 to charity from a £500,000 estate, your beneficiaries might only receive £30,000-£35,000 less (not £50,000 less) because of the tax reduction. The government effectively contributes £15,000-£20,000 toward your charitable gift through reduced tax.

Myth: I can just write '10% of my residuary estate to charity' in my will and automatically qualify for the reduced rate.

Reality: A clause stating "10% of residue to charity" can fail to meet the 10% threshold if your will contains significant specific legacies. The baseline amount includes all chargeable assets minus the nil rate band, while residue is what remains after specific gifts. If specific gifts exceed the nil rate band, 10% of residue will be less than 10% of the baseline, disqualifying the estate. Professional will drafting using formula clauses that reference the baseline amount specifically is essential to ensure qualification.

Understanding the reduced IHT rate connects to these related concepts:

  • Inheritance Tax: The reduced IHT rate is a specific lower rate (36%) of inheritance tax that applies instead of the standard 40% rate.
  • Charity Exemption: Charitable gifts themselves are 100% exempt from IHT regardless of value; the reduced rate provides an additional benefit by lowering tax on the non-charitable portion.
  • Charitable Legacy: The mechanism through which you structure the gift in your will to meet the 10% threshold and qualify for the reduced rate.
  • 10% Charitable Donation Threshold: The specific qualifying condition that must be met based on the baseline amount calculation to access the 36% rate.
  • Inheritance Tax Planning Strategies: Discover how the reduced IHT rate fits into comprehensive tax planning alongside nil rate band optimization and lifetime gifting strategies.
  • Charitable Giving in Wills: Learn the broader context of leaving charitable legacies and how to structure them effectively to maximize both charitable impact and tax benefits.
  • Complex Estate Planning: Understand how the reduced rate calculation becomes more intricate for estates with trusts, lifetime gifts, or the three-component system.
  • Tax-Efficient Estate Planning: Explore whether charitable giving with the reduced rate makes financial sense for your overall estate distribution goals.
  • Deeds of Variation: Find out how executors and beneficiaries can implement the reduced rate strategy after death to retroactively reduce inheritance tax bills.

Need Help with Your Will?

Understanding the reduced IHT rate is important, but implementing it correctly through precise will drafting is essential. WUHLD guides you through charitable gifts and tax-efficient estate planning with clarity.

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Legal Disclaimer: This glossary entry provides general information about UK legal terminology and does not constitute legal or tax advice. The reduced IHT rate calculation can be complex, particularly for estates with trusts or significant assets. HMRC provides Form IHT430 and an online calculator to assist with calculations. For advice specific to your situation, consult a qualified solicitor or tax adviser.