Understanding inheritance tax when making charitable gifts in your will

Charitable gifts can support causes close to your heart and reduce inheritance tax (IHT). But recent changes mean good intentions need greater consideration. Even if your favourite charity hasn’t changed, your will and pension nomination may need to.

How does the 36% rate work?

Gifts to qualifying charities are exempt from IHT. Leave at least 10% of the relevant estate component’s ‘baseline amount’ to charity and the IHT rate on its remaining taxable value falls from 40% to 36%.

The baseline allows for relevant exemptions, reliefs and the component’s share of the nil-rate band, before deducting charity gifts. It isn’t simply 10% of everything you own, and each component can be tested separately.

Pensions: an unexpected increase in generosity?

From 6 April 2027, most unused pension funds and pension death benefits will come within IHT. Under the original approach, these would join the ‘general component’ for the 10% test.

Suppose your general estate is £1 million, previous gifts have used your nil-rate band, and your will leaves whatever amount to charity to secure the 36% IHT rate. That means currently £100,000 would be left to charity. Adding a £500,000 pension from April 2027 would increase the gift to charity to £150,000, even if the pension went to family. Admirable generosity, perhaps, but not necessarily what you signed up for.

The 2026 Budget announced a choice: administrators could treat pensions separately or within the general component. This should reduce unintended outcomes, but separation doesn’t automatically extend the estate’s 36% rate to pensions. Review will wording, pension nominations and component calculations together.

Leave the right assets to the right people

If you die aged 75 or over, beneficiaries generally pay income tax on inherited pension withdrawals. However, estate capital doesn’t carry that additional income tax charge. Where the conditions are met, a nominated charity can receive pension death benefits tax-free.

Suppose someone dies over 75 on or after 6 April 2027, leaving a £1 million estate and £500,000 pension, with no available nil-rate bands or other reliefs. The same beneficiaries inherit both and pay 45% income tax on pension withdrawals. For a like-for-like comparison, assume the components are combined for the 10% test: a £150,000 charitable gift secures 36% IHT on both, whichever pot funds it.

Comparison	Estate gives to charity	Pension scheme gives to charity
Estate before gifts and tax	£1,000,000	£1,000,000
Charity receives (tax-free)	(£150,000)
Estate IHT at 36%	(£306,000)	(£360,000)
Net estate to beneficiaries	£544,000	£640,000

Pension before gifts and tax	£500,000	£500,000
Charity receives (tax-free)		(£150,000)
Pension IHT at 36%	(£180,000)	(£126,000)
Pension after gift and IHT	£320,000	£224,000
Income tax on pension at 45%	(£144,000)	(£100,800)
Net pension to beneficiaries	£176,000	£123,200

Total beneficiaries receive	£720,000	£763,200
Extra for beneficiaries	—	£43,200

Same gift, same £486,000 IHT bill — but £43,200 less income tax when the pension funds the donation.

Why wait? Giving during your lifetime

Gift Aid adds 25p for every £1 donated. Higher- and additional-rate taxpayers can also claim personal income tax relief, potentially making lifetime giving more attractive than a legacy.

Suppose you pay 45% income tax and donate £8,000 with Gift Aid. The charity claims £2,000, receiving £10,000. Assuming sufficient income taxed at 45%, you reclaim £2,500 personally, reducing the cost of your donation to £5,500. Combined income tax relief is £4,500.

A £10,000 legacy saves £3,600 IHT where the estate already qualifies for 36%, costing beneficiaries £6,400. Lifetime giving therefore provides £900 more tax support for the same charitable benefit. Compared with an £8,000 legacy, Gift Aid also puts £2,000 extra in the charity’s hands.

Gift Aid conditions, sufficient tax paid and affordability matter. Beyond tax, the charity benefits sooner, you see your gift making a difference and enjoy peace of mind that it’s sorted. It might also provide further IHT savings should the donation being to reinstate the residence nil rate band.

A charitable trust trap

For deaths from 6 April 2026, leaving assets on trust for charitable purposes no longer automatically secures IHT charitable exemption. Relief for charitable trusts created by will is uncertain; don’t assume registration after death will fix things.

Safer options include naming qualifying charities, establishing and appropriately registering your charity during life, or leaving a gift to an existing donor-advised fund provider such as the Charities Aid Foundation.

Time for a charitable check-up

If charitable gifts feature in your estate planning, significant changes make a review essential. Revisit your will, pension nominations and lifetime giving together, so your plans remain tax-efficient and benefit your chosen causes as you intend.