The 36% Reduced IHT Rate: When Leaving 10% to Charity Actually Saves the Estate Money
If a will leaves at least 10% of the estate's "baseline amount" to charity, the Inheritance Tax rate on the taxable estate drops from 40% to 36%. Because the rate cut applies to a large slice of the estate while the gift comes off a smaller one, the family can sometimes inherit more after the charity has been paid than they would have if nothing had gone to charity at all. This guide shows exactly when that happens, with a full worked example.
The reduced rate is set out in Schedule 1A of the Inheritance Tax Act 1984 and applies to deaths on or after 6 April 2012. It is one of the few situations in UK tax where giving money away can leave your beneficiaries better off — but only when the gift clears the 10% threshold precisely. Fall a few pounds short and you get the worst of both worlds: the charity is paid, but the whole estate is still taxed at 40%.
Below, I walk through how the test is actually measured (it is not 10% of your total wealth), a real-figures worked example on an £825,000 estate, why the family ends up ahead, how the estate splits into separate "components" that each have to pass the test, and how to draft the will so the 10% stays locked in even if asset values move before death.
The headline numbers
HMRC's published rates, confirmed on the official Inheritance Tax pages, are:
| Item | Figure | Notes |
|---|---|---|
| Standard IHT rate | 40% | On the value of the estate above the available nil-rate band(s) |
| Reduced IHT rate | 36% | Applies if 10%+ of the baseline amount passes to charity |
| Nil-rate band (NRB) | £325,000 | Frozen at this level; per individual |
| Residence nil-rate band (RNRB) | up to £175,000 | Extra band where a home passes to direct descendants |
Sources: gov.uk — Inheritance Tax (40% standard rate, £325,000 nil-rate band, 36% reduced rate) and HMRC's Inheritance Tax Manual IHTM45000 (reduced rate mechanics, Schedule 1A IHTA 1984). Figures current for the 2025–26 tax year.
What the 10% is actually measured against — the "baseline amount"
The single most common mistake is thinking the test is "leave 10% of everything I own to charity." It is not. The 10% is measured against the baseline amount, which is a much smaller figure than the gross estate because the nil-rate band has already been taken out.
HMRC defines the baseline amount, in plain terms, as:
Baseline amount = the value of the estate component
− available nil-rate band attributable to that component
− other exemptions and reliefs (e.g. spouse exemption, Business or Agricultural Relief)
+ the charitable donation added back in
That last line is the technical twist. HMRC's guidance (IHTM45006) describes the baseline as "the value transferred by a chargeable transfer, but after adding back the amount that qualifies for charity exemption." In practice this means you work out the taxable estate after the nil-rate band but before the charity gift is removed, and the gift must be at least 10% of that number.
Why does it matter? Because the nil-rate band — £325,000, or up to £500,000 once the residence nil-rate band is in play — is stripped out first. So a £650,000 estate with a full £325,000 NRB has a baseline of roughly £325,000, and the qualifying charity gift only needs to be about £32,500, not £65,000. The headline estate is twice the size of the number the 10% bites on.
The "cliff edge" you must clear
The 10% test is all-or-nothing. Give 9.9% of the baseline and the entire taxable estate is charged at 40%. Give 10.0% and the entire taxable estate drops to 36%. There is no sliding scale. This is why practitioners build in a small safety margin — you never want to miss the threshold by a rounding error.
Worked example: an £825,000 estate
Margaret Whitfield, a widow, dies in the 2025–26 tax year leaving a free estate worth £825,000. Her late husband left everything to her, so she has her own £325,000 nil-rate band plus his transferred £325,000 — a combined £650,000 of nil-rate band. (She rents, so no residence nil-rate band applies here.) She wants to leave something to Cancer Research UK and the rest to her two children. We compare two versions of her will.
Step 1 — find the baseline amount.
Estate £825,000 − combined nil-rate band £650,000 = £175,000 baseline amount. This is the figure the 10% test is measured against — not the £825,000.
Step 2 — find the 10% threshold.
10% of £175,000 = £17,500. Any charitable gift of £17,500 or more qualifies the estate for the 36% rate. Margaret decides to leave a clean £50,000 to charity, comfortably above the line.
Now compare the two scenarios side by side. In both, the £650,000 nil-rate band is tax-free; tax only ever bites on the £175,000 above it.
| Scenario A: no charity gift | Scenario B: £50,000 to charity | |
|---|---|---|
| Gross estate | £825,000 | £825,000 |
| Less nil-rate band(s) | −£650,000 | −£650,000 |
| Less charity gift (exempt) | £0 | −£50,000 |
| Taxable estate | £175,000 | £125,000 |
| IHT rate | 40% | 36% (10% test passed) |
| IHT payable | £70,000 | £45,000 |
| Charity receives | £0 | £50,000 |
| Children receive | £755,000 | £730,000 |
Here the family is £25,000 worse off (£755,000 vs £730,000) but a charity Margaret cared about gets £50,000, of which the Treasury effectively funds £25,000 through the lower tax bill. The "cost" to her children of a £50,000 charitable legacy is only £25,000 — the charity is half-funded by HMRC.
So this is the honest version: a charity gift this size does not make the family richer than giving nothing. What makes the family come out ahead is a different, sharper situation — when the estate is sitting just above a charity threshold already, or when you compare a smaller intended gift against the qualifying one.
When the family genuinely receives more
Suppose Margaret had instead planned to leave a £10,000 token gift to the same charity — below the £17,500 threshold, so the estate is still taxed at 40%.
With the £10,000 gift (40% rate): taxable estate £175,000 − £10,000 = £165,000 × 40% = £66,000 tax. Charity gets £10,000; children get £749,000.
Increase the gift to £17,500 to clear the test (36% rate): taxable estate £175,000 − £17,500 = £157,500 × 36% = £56,700 tax. Charity gets £17,500; children get £750,800.
By giving the charity £7,500 more, Margaret's children end up with £1,800 more too — and the charity receives £7,500 extra. Everyone except HMRC is better off. The tax saving (£66,000 → £56,700 = £9,300) more than pays for the larger gift.
This is the real lesson. If an estate is going to make a charitable gift anyway, and that gift is somewhere near 10% of the baseline, it almost always pays to top it up to the full 10%. The extra giving is more than funded by the rate cut on the rest of the estate. HMRC even publishes a reduced-rate calculator for exactly this comparison.
How the estate splits into "components" for the test
This is where the reduced rate gets genuinely technical and where errors creep in. The 10% test is not applied to the whole estate as one lump. HMRC divides the estate into up to three separate components, and each component is tested on its own:
| Component | What's in it | Typical example |
|---|---|---|
| General (free estate) component | Property passing under the will or intestacy that the deceased owned outright | The home (if solely owned), bank accounts, investments, possessions |
| Survivorship (joint) component | Jointly owned property passing automatically by survivorship to the co-owner | A house held as joint tenants, a joint bank account |
| Settled property component | Trust property in which the deceased had a qualifying interest in possession | An interest-in-possession trust set up by a late spouse |
Each component has its own baseline amount and its own 10% test. A charitable gift made out of the free estate only counts towards the general component — it does not, by default, help the joint property or trust components pass. So you can have an estate where the free estate easily clears 10% to charity but the trust component is taxed at the full 40% because no charity gift came out of it.
Property subject to a reservation of benefit (e.g. a home you gave away but kept living in rent-free) sits outside the components and cannot qualify for the reduced rate on its own, per IHTM45000.
Merging components
Beneficiaries (the people who would otherwise bear the tax) can make an election to merge two or more components and test them together. This is useful when one big charitable gift from the free estate would, if spread across the whole estate, clear 10% overall — merging lets that single gift qualify the joint and trust elements too, dropping all of them to 36%. The merger election is irreversible for that estate, so it should be modelled carefully before it is made.
Drafting the will so the 10% stays locked in
The danger with a fixed-sum charitable legacy — "I leave £50,000 to charity" — is that asset values move between the date the will is signed and the date of death. If the estate shrinks, a fixed gift might balloon past what was intended; if the estate grows, a fixed gift can quietly fall below 10% of a now-larger baseline, and the reduced rate is lost.
The standard professional fix is a formula clause rather than a fixed figure. Instead of naming a pound amount, the will defines the gift as "such sum as equals 10% (or 10.x%) of the baseline amount for the purposes of Schedule 1A of the Inheritance Tax Act 1984." The gift then self-adjusts to whatever 10% of the baseline turns out to be at death, so the estate always qualifies regardless of how values have changed.
- Use a formula gift, not a fixed sum — defined as a percentage of the Schedule 1A baseline amount so it self-corrects.
- Build in a small margin — many practitioners draft "10.something%" so a valuation dispute or late-discovered asset can't push you below the cliff edge.
- Name the component(s) the gift is taken from, and consider whether a merger election will be needed for joint or trust property.
- Reference the relevant tax year's rules generically, so the clause survives if thresholds change.
- Keep the gift flexible on which charity where appropriate (the relief applies to gifts to UK and qualifying EU/EEA charities), but make sure the recipient is a qualifying charity for IHT purposes.
The Society of Trust and Estate Practitioners (STEP) publishes a model "10%-and-the-balance to charity" clause that does exactly this, and most will-drafting software now includes a Schedule 1A formula option. If your existing will has a fixed-sum charitable legacy and your estate has grown, it is worth reviewing whether you still clear the 10% baseline.
Can the reduced rate be claimed after death?
Yes. If a will doesn't already qualify, the family can sometimes redirect part of the estate to charity using a deed of variation within two years of death, to clear the 10% threshold retrospectively. This is a powerful tool when the original will fell just short — but it needs all affected beneficiaries to agree, so it is far cleaner to get the drafting right in the first place.
- The reduced rate is 36% instead of 40%, available when at least 10% of the estate's baseline amount passes to charity.
- The baseline is the estate after the nil-rate band, exemptions and reliefs — usually far smaller than the gross estate — so the qualifying gift is smaller than people expect.
- It is a cliff edge: 9.9% gets you nothing, 10.0% drops the whole taxable estate to 36%.
- On an £825,000 estate with £650,000 of nil-rate band, the baseline is £175,000 and a £17,500 gift is enough to qualify.
- When a gift is already near 10%, topping it up to the threshold often leaves the family with more as well as the charity.
- The estate splits into general, survivorship and settled-property components, each tested separately — or merged by election.
- Draft a formula gift (a percentage of the Schedule 1A baseline), not a fixed sum, so the 10% stays locked in as values change.
Frequently asked questions
Does leaving 10% to charity mean my whole estate is taxed at 36%?
No — only the taxable portion (the value above your available nil-rate bands) is charged, and that portion drops from 40% to 36%. The nil-rate band itself is always tax-free regardless of any charity gift. So the 36% rate applies to the slice that would otherwise have been taxed at 40%.
Is the 10% measured against my total wealth?
No. It is measured against the baseline amount — broadly the estate after deducting the nil-rate band, exemptions and reliefs, with the charity gift added back in. Because the nil-rate band (£325,000, or up to £500,000 with the residence nil-rate band) is stripped out first, the baseline is much smaller than your gross estate, and the qualifying gift is correspondingly smaller.
Will my family actually inherit more if I leave money to charity?
Not compared with leaving nothing — a charity gift always costs the family something net. But when an estate is going to give to charity anyway and the planned gift is close to 10% of the baseline, topping it up to the full 10% can leave the family better off than the smaller gift would have, because the 4-point rate cut on the rest of the estate more than pays for the extra giving. Our worked example shows the children gaining £1,800 while the charity gains £7,500.
What if asset values change after I sign my will?
A fixed-sum legacy can drift below 10% of a larger baseline and lose the reduced rate. The professional fix is a formula clause that defines the gift as a percentage of the Schedule 1A baseline amount, so it self-adjusts at death and always qualifies. Ask your solicitor to draft it this way and build in a small margin above 10%.
What are the estate "components" and why do they matter?
HMRC divides the estate into up to three components — the general (free estate), the survivorship (joint property), and the settled property (trust) components. Each is tested for the 10% separately. A gift from your free estate doesn't automatically help your jointly owned home or a trust qualify unless the beneficiaries elect to merge the components and test them together.
Can we still claim the reduced rate if the will didn't qualify?
Often, yes. Within two years of death the beneficiaries can use a deed of variation to redirect enough to charity to clear the 10% baseline. Everyone who loses out must agree, so it is cleaner to draft the will correctly, but a variation is a valuable rescue route when an estate falls just short.
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