How to Reduce Your Inheritance Tax Rate From 40% to 36%?

Inheritance Tax (IHT) is a tax paid on an individual's estate (e.g. property, money and personal possessions) when they pass away. 

In the UK: 

• The standard rate of IHT is 40%, applied to the value of the estate that exceeds any available tax-free allowances. 
• With effective estate planning, you may be able to reduce your IHT liability to 36%, by leaving at least 10% of the net value of your estate to charity in your Will. 

Many people only consider IHT when a loved one passes away.  However, thinking ahead and making or reviewing your existing Will can reduce any potential IHT liability, ensuring your assets can pass to your loved ones as you intend.  

For the 2025/26 tax year, the following thresholds apply: 

• IHT Nil Rate Band (NRB): £325,000
  • This is the amount of your estate that can be passed on tax-free.  Anything above this sum may be taxed at 40%, subject to any available reliefs or exemptions. 
• Residence Nil Rate Band (RNRB): £175,000
  • This, in addition to the NRB, applies when your main residence is passed to direct descendants (e.g. your children, grandchildren or other lineal descendants).

If you are married or in a civil partnership, any unused NRB or RNRB can be transferred to your surviving partner.  This means a couple could potentially pass on up to £1 million tax-free if they leave their home to their direct descendants. 

Please note that the RNRB is not available to those without direct descendants. 

Normally, any part of your estate above the IHT tax-free thresholds will be taxed at 40%.  However, if you leave at least 10% of your net estate to registered charities in your Will, the IHT rate on the remainder of your taxable estate can be reduced to 36%. 

This rule can result in substantial tax savings, while allowing you to support meaningful causes. 

Your net estate is the value of your estate after deducting: 

• Any unused available NRB;
• The RNRB (if applicable);
• Any other reliefs (such as business or agricultural property relief).

Let's consider these two scenarios of saving IHT through charitable giving. 

Scenario 1: No charitable gifts under your Will

• Estate value: £1 million
• NRB applied: £325,000
• Taxable estate: £675,000
• Tax rate: 40%
• IHT due: £270,000

Scenario 2: Gifts to charities under your Will (10% of the net estate)

• Estate value: £1 million
• NRB applied: £325,000
• Gift to charity: £100,000
• Taxable estate: £575,000
• Tax rate: 36%
• IHT due: £207,000

Tax saving: £63,000

To qualify for the reduced 36% IHT rate, the gift or gifts must be made to a UK-registered charity or an eligible charitable organisation. They should equate to at least 10% of the net value of your estate after any available IHT allowances and reliefs.  Additionally, the gift(s) must be clearly stated in a legally valid Will. 

Leaving a charitable gift in your Will offers several benefits.  It can reduce your estate's IHT liability from 40% to 36%, while supporting good causes and leaving monies to charities you care about most. 

"I already donated during my lifetime.  Do I need to include a legacy in my Will?" 

Lifetime giving to charities is commendable, but only charitable gifts made through your Will count towards the 10% threshold needed to reduce the IHT rate from 40% to 36%. 

"Can't my family just make a donation to charity after I die?"

No. For the lower 36% Inheritance Tax rate to apply, the gift must be written into a legally valid Will.  Informal donations made by your family will not qualify your estate for the reduced IHT rate.