Leaving 10% to charity: how the reduced 36% inheritance tax rate works

The 36% rule at a glance

Adding £7,500 to a charitable gift can cut an estate's inheritance tax bill by £16,500, leaving the family £9,000 better off while the charity receives more too. That is the worked example at the heart of this guide, and it rests on a rule that has applied to deaths on or after 6 April 2012: leave at least 10% of the estate's baseline amount to qualifying charities and the inheritance tax rate charged on the rest of the taxable estate falls from 40% to 36%. GOV.UK confirms the rule: you may qualify to pay inheritance tax at 36% if you leave at least 10% of your net estate to charity. This sits on top of a separate, unconditional benefit: whatever you leave to a qualifying charity is completely exempt from inheritance tax, with no cap.

The word doing the heavy lifting in that GOV.UK sentence is "net". The 10% test is not measured against your whole estate. It is measured against a specific figure HMRC calls the baseline amount, which is what remains after debts, reliefs, exemptions and the £325,000 nil-rate band have been stripped out, but crucially before the charitable gift itself is deducted. Get the base wrong and you can either overpay charity thinking you need 10% of everything, or fall just short of the threshold and pay 40% when a slightly larger gift would have cut the whole bill. What follows is general information rather than legal or financial advice, written from an England and Wales standpoint although inheritance tax itself operates across the whole of the UK; structuring a will to use the reduced rate is a job for a solicitor or tax adviser.

Two separate benefits, one common confusion

It is worth pinning the two mechanisms apart, because they work differently and only one of them carries a threshold.

• The charity exemption. Under GOV.UK's guidance on gifts to charity in wills, your donation is taken off the value of your estate before inheritance tax is calculated. This applies to any gift, of any size, to a charity registered in the UK (and certain equivalent bodies). Leave £500 to a hospice and that £500 is simply never taxed.
• The reduced 36% rate. A conditional extra. Once the charitable gift reaches 10% of the baseline amount, every remaining taxable pound in that part of the estate is taxed at 36% instead of 40%. The saving lands on the family and other non-exempt beneficiaries, not on the charity, which was exempt anyway.

The first benefit is automatic. The second has a precise arithmetic test, and the test is where wills go wrong.

What exactly is the baseline amount?

HMRC's Inheritance Tax Manual sets out the calculation at IHTM45009 in three steps, applied to each component of the estate (more on components below):

1. Start with the chargeable value. Take the value of the estate that is chargeable to inheritance tax: assets minus liabilities, minus reliefs such as business or agricultural relief, minus exemptions, including the charitable gift itself at this stage.
2. Deduct the nil-rate band. Take off the appropriate share of the available nil-rate band, currently £325,000 and frozen until 5 April 2031, adjusted for any transferable nil-rate band from a late spouse and reduced by chargeable lifetime gifts. Note one trap inside the trap: the residence nil-rate band is not deducted at this step, so an estate using the RNRB has a higher baseline amount than intuition suggests.
3. Add the charitable gift back. The amount deducted for the charity exemption at step 1 is added back in. The result is the baseline amount, and the gift must be at least 10% of it.

That add-back at step 3 has a neat consequence. Because the gift is removed at step 1 and restored at step 3, the baseline amount is the same fixed figure however much you leave to charity. You are not chasing a moving target: for a given estate, there is a single number, and 10% of it is the exact gift that unlocks the reduced rate. HMRC's worked single-component example at IHTM45010 follows precisely this pattern, and solicitors routinely draft wills with a formula clause leaving "such sum as equals 10% of the baseline amount" so the test is met automatically whatever the estate turns out to be worth, a drafting approach HMRC itself anticipates at IHTM45013.

Before any of this, you need to know how much of your estate sits above the nil-rate band at all, because that is the raw material of the baseline amount. Our IHT threshold calculator establishes that position, and our guide to the UK inheritance tax threshold explains the allowances feeding into it, including the transferable band for married couples and the RNRB.

Worked example: the £7,500 top-up that saves a family £9,000

Gordon, a retired surveyor who never married, dies with an estate of £700,000, all in savings and investments (no home passing to descendants, so no residence nil-rate band, and a single £325,000 nil-rate band since there is no late spouse to transfer one from). His will leaves £30,000 to charity and the rest to his two nephews.

Does he pass the 10% test? Step 1: chargeable value is £700,000 minus the £30,000 exempt gift, £670,000. Step 2: deduct the £325,000 nil-rate band, £345,000. Step 3: add the £30,000 back, giving a baseline amount of £375,000. Ten per cent of that is £37,500. His £30,000 gift falls short, so the estate pays the full 40% on £345,000: £138,000. The nephews receive £532,000.

Now suppose his will had left £37,500 to charity, exactly 10% of the baseline (which, remember, stays at £375,000 because of the add-back). The taxable estate is £700,000 minus £37,500 minus £325,000, which is £337,500, now taxed at 36%: £121,500. The nephews receive £541,000.

	Gift of £30,000 (fails test)	Gift of £37,500 (passes test)
Charity receives	£30,000	£37,500
Baseline amount	£375,000	£375,000
Taxable estate	£345,000	£337,500
Rate	40%	36%
Inheritance tax	£138,000	£121,500
Family receives	£532,000	£541,000

Giving the charity an extra £7,500 cuts the tax bill by £16,500, so the family ends up £9,000 better off. The charity gains, the beneficiaries gain, and the only loser is HMRC. That is the cliff edge the rule creates: near the threshold, a bigger charitable gift is not generosity at the family's expense, it is arithmetic in the family's favour.

There is a useful rule of thumb hiding in the algebra. Because passing the test converts the whole taxable estate from 40% to 36%, the break-even gift is 4% of the baseline amount. If a will already leaves more than 4% of the baseline to charity but less than 10%, topping the gift up to the full 10% always leaves the other beneficiaries better off in cash terms. Below 4%, the top-up costs the family money and becomes a genuine act of giving. Either way it should be a deliberate choice, made with the numbers in front of you, not an accident of drafting.

The component rules: where simple explanations fall over

Everything above assumed a simple estate passing entirely under a will. Real estates are often messier, and HMRC's manual at IHTM45003 divides an estate into components for the 10% test:

• The survivorship component: assets passing automatically to a surviving joint owner, such as a jointly held home or joint bank accounts.
• The settled property component: trust property in which the deceased had a qualifying interest in possession.
• The general component: everything passing under the will or intestacy, which is where charitable legacies almost always sit.

The reduced rate applies separately to each component, each with its own baseline amount, so as HMRC puts it, one component may bear tax at 36% while others pay the full rate. A generous charitable legacy in the will can secure 36% for the general component while a jointly owned house passing by survivorship still suffers 40%. Two elections soften this. The people benefiting can elect to merge components so that a gift exceeding 10% in one component carries others with it. And under the opt-out election described at IHTM45042, the appropriate persons, the personal representatives for the general component, trustees or surviving joint owners for the others, can elect for the reduced rate not to apply, typically where a borderline gift makes the paperwork cost more than the saving. If your estate involves joint property or trusts, treat every simplified explainer, including this one, as a starting point only: the component split materially changes the answer, and the interaction with reliefs and trust charges (see our guide to inheritance tax on trusts and the 10-year charge) needs a professional eye.

Fixing it after death: deeds of variation

The reduced rate is not lost just because the will got it wrong. Beneficiaries can redirect part of their inheritance to charity within two years of the death using a deed of variation, and provided the deed contains the correct statements it is read back into the will for inheritance tax, allowing an estate that failed the 10% test to pass it retrospectively. In a case like Gordon's, his nephews could sign a variation adding £7,500 to the charitable gift and share the £9,000 saving between them. Our companion guide to deeds of variation covers the requirements and deadlines in full. Executors then claim the reduced rate through the estate's IHT400 account, one of several calculation points where executors carry personal responsibility for getting the figures right during probate.

Where this fits in a wider estate plan

The 36% rate is one lever among several. Lifetime giving within the exemptions, or larger gifts survived by seven years, removes value from the estate altogether, a different mechanic explained in our guide to the 7-year rule for gifts, whereas a charitable legacy reduces the rate on what remains at death. Which combination suits you depends on your assets, your family and how much you actually want charities to receive; nothing here is a recommendation to leave any particular amount to charity. The starting point is knowing your estate's position against the allowances, which the IHT threshold calculator and our inheritance tax pillar guide will give you.

The most reliable way to capture the 36% rate is a formula clause in the will itself: a legacy of "such sum as equals 10% of the baseline amount", so the test is met automatically whatever the estate turns out to be worth at death. An existing will does not need a full rewrite to add one; a short codicil can do it. If your figures put you anywhere near the 10% threshold, or your estate includes joint property or trust interests, we can put you in touch with an estate-planning specialist to draft or check that clause. One correctly worded sentence in a will can be worth a five-figure saving to the family reading it later.