Inheritance tax relief on gifts to charity

With effect from April 2012 there will be a new Inheritance Tax (IHT) relief to encourage gifts to charity. The proposal, introduced by the 2011 budget, is intended to reduce the rate of IHT payable on estates from 40% to 36% if 10% of the taxable estate passes to charity. The relief will only apply on death – not on lifetime gifts.

Charities who are seeking to attract legacies should be alerting donors to the new rules now, in the hope of boosting philanthropy, as is the intention, without greatly reducing the family’s inheritance.

The idea seems to be to encourage testators to give more to charity, without a matching reduction in the amount passing to the family. There will be practical problems drafting the Will to achieve the 10% charitable bequest as there are many circumstances in which a formula can undershoot, or overshoot, the target level.

Practical consequences of meeting the 10% test

The table below illustrates the practical consequences and assumes that the value of the net estate is £850,000, the full nil rate band of £325,000 is available and no reliefs or exemptions other than the charity exemption apply. It will also be seen that over the 10% threshold, the IHT saving as a % diminishes.

Distribution of estate

No charitable legacies: current law and new law

4% legacy: current law and new law

10% legacy: current law

10% legacy: new law

20% legacy: new law

Amount passing to charity






Amount passing to non-charitable beneficiaries












Total value of estate






Cost of charitable gift to non-charitable beneficiaries


Reduction in amount passing to non-charitable beneficiaries






Reduction as % of amount passing to charity






However, if there is no current intention to benefit charity to a significant degree, this measure may not be enough by itself to persuade testators to change their Wills. Unless current proposals are adjusted, the 10% (or more) left to charity will not be recouped by the family by reason of the reduced 36% IHT rate. Family (or non exempt beneficiaries generally) will receive less as a result of the 10% provision in the Will than they would if the testator left the whole estate to their family with tax at 40%.

How should the Will be drafted to meet the 10% test?

For testators who are very keen to benefit from the reduced rate but who do not want to give more to a charity than is necessary a discretionary trust is probable the best option. The testator can include charities as potential beneficiaries of the discretionary trust, or can give the trustees the power to add them. The impact on the family of leaving 10% to charity can then be reviewed, and the correct legacy formula determined to take advantage of the new relief under the law in place at the date of death.


HMRC carried out a consultation on the proposal from 10 June to 31 August 2011. The consultation landing page provides a link to the consultation document, which is only available as a pdf.

There has been a mixed response to the proposal by professional bodies and other commentators. The Chartered Institute of Taxation (CIOT) and the Tax Faculty of the Institute of Chartered Accountants in England and Wales (ICAEW) have each proposed a non-repayable tax credit as an alternative. CIOT has been particularly critical of the proposal.

HMRC will publish a summary of responses to the consultation later in 2011. It will publish draft legislation for further consultation before the 2012 Budget, with a view to implementation in the Finance Bill 2012. HMRC expects the reduced rate to apply to the estates of testators who die on or after 6 April 2012.

Whilst the proposals are good news in principle, charities will need to make considerable efforts to educate their regular donors, and the wider population, to help them make the most of this incentive.

The law and practice referred to in this article has been paraphrased or summarised. It might not be up-to-date with changes in the law and we do not guarantee the accuracy of any information provided at the time of reading. It should not be construed or relied upon as legal advice in relation to a specific set of circumstances.

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