If at least 10% of the “baseline amount” of an estate component is left to charity, inheritance tax on that component is charged at 36% instead of 40%. The baseline amount is the chargeable estate after deducting the available nil rate band, with the charitable gift added back, and it is measured separately for jointly owned assets, trust property and everything else unless the people responsible elect to merge them.
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Where does the 36% rate come from?
The reduced rate is in Schedule 1A to the Inheritance Tax Act 1984 (IHTA 1984), introduced by Finance Act 2012. HMRC’s Inheritance Tax Manual at IHTM45001 confirms it applies only to charges arising on death, and only for deaths on or after 6 April 2012. Paragraph 2(6) sets the lower rate at 36%, and paragraph 2(2) sets the charitable giving condition: for one or more components of the estate, the donated amount must be at least 10% of the baseline amount.
The standard rate on death remains 40%, as GOV.UK confirms. The reduced rate does not apply to lifetime chargeable transfers or to trust ten year and exit charges.
What are the components of the estate?
Paragraph 3 divides the death estate into three components, and the 10% test is applied to each one separately:
- The survivorship component. Joint property that passes by survivorship (or under a special destination in Scotland, or a foreign equivalent).
- The settled property component. Trust property in which the deceased had an interest in possession that is taxed as part of their estate under section 49(1). IHTM45005 confirms this includes pre March 2006 interests in possession and immediate post death interests.
- The general component. Everything else, mainly the free estate passing under the will, including assets held as tenants in common (IHTM45007).
Property caught by the gift with reservation rules is not a component on its own. IHTM45006 explains it can only qualify if it is merged with another component by election.
So a will leaving 10% of residue to charity may get 36% on the free estate, while a jointly owned house passing to a surviving partner, or a life interest trust, is still taxed at 40%.
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How is the baseline amount calculated?
Paragraph 5 sets out three steps for each component:
- Take the part of the chargeable transfer on death that is attributable to that component, after exemptions and reliefs.
- Deduct that component’s share of the available nil rate band. The available nil rate band is the nil rate band maximum, increased by any transferred nil rate band under section 8A, less chargeable transfers in the seven years before death. IHTM45009 confirms the residence nil rate band is not deducted.
- Add back the charitable gifts from that component. The result is the baseline amount.
The donated amount is the value of property in the component that qualifies for the charity exemption under section 23(1). HMRC’s threshold table shows the nil rate band at £325,000 from 6 April 2009 to 5 April 2031, so that is the starting figure for deaths in 2026 to 2027.
Because the residence nil rate band is ignored and lifetime gifts reduce the available nil rate band, the charitable gift needed is often more than people expect. GOV.UK describes the test as leaving 10% of the “net value” of the estate, but the statutory measure is the baseline amount.
What does the calculation look like in HMRC’s own example?
IHTM45010 gives this example. An estate is worth £750,000 after liabilities and leaves £50,000 to charity.
| Step | Amount |
|---|---|
| Estate after liabilities | £750,000 |
| Less charitable legacy | £50,000 |
| Chargeable transfer (step 1) | £700,000 |
| Less nil rate band (step 2) | £325,000 |
| Step 2 amount | £375,000 |
| Add back legacy (step 3) | £50,000 |
| Baseline amount | £425,000 |
10% of £425,000 is £42,500, so the £50,000 legacy passes. HMRC calculates tax of £135,000 at 36% against £150,000 at 40%.
IHTM45011 then shows what lifetime gifts do. Add a £150,000 gift to a daughter four years before death, and the available nil rate band falls to £175,000. The baseline amount rises to £575,000, so the 10% figure is £57,500 and the £50,000 legacy fails. HMRC notes that increasing the legacy by £7,500 through a variation would cut the tax from £210,000 to £186,300, a saving of £23,700 that more than covers the extra gift.
Can the components be merged?
Yes, under paragraph 7, but only if at least one component already passes the 10% test on its own. The election treats that qualifying component and one or more of the others (and any gift with reservation property) as a single component. If the combined donated amount is at least 10% of the combined baseline amount, everything in it gets 36%. IHTM45035 stresses the merger is only for the 10% test: it does not increase what the charity actually receives.
The election must be made by all the “appropriate persons” for each part: the personal representatives for the general component, the people who take the joint property for the survivorship component, and the trustees for settled property (paragraph 7(7)).
Can an estate opt out, and what are the deadlines?
Paragraph 8 allows an election to treat a component as failing the 10% test. IHTM45040 explains this exists for cases where agreeing values, for example of property left specifically to charity, would cost more than the tax saved. Paragraph 9 requires any merger or opt out election to be made in writing to HMRC within two years of the death, and allows withdrawal up to two years and one month after the death. HMRC can extend both limits.
How can a will or a variation be drafted to meet the test?
Because the baseline amount is only known once the estate is valued, a fixed cash legacy may miss the target. IHTM45008 accepts a clause leaving “such a sum as shall constitute a donated amount equal to 10 per cent of the baseline amount” of a named component, with optional minimum and maximum amounts, as always meeting the test.
Beneficiaries can also use a deed of variation within two years to create or top up a charitable gift (IHTM45007). Section 142(3A) requires that the charity is notified of the variation. IHTM45039 says the bar on consideration in section 142(3) will not normally apply just because the variation also produces the lower rate on another component. A surviving joint owner can vary their share in favour of charity, but IHTM45004 notes the property stays in the survivorship component for the test.
Which gifts count as charitable?
Only gifts that qualify for the charity exemption in section 23. IHTM11112 explains that from 1 April 2024 no transfer to a body outside the UK is exempt, so a legacy to an overseas charity does not count toward the 10%. Finance Act 2026, section 78, also removed the exemption for property merely held on trust for charitable purposes, for deaths on or after 6 April 2026, so the gift must be given to a charity. For income tax relief on lifetime giving see giving assets to charity.
What should executors watch for?
- Use HMRC’s online reduced rate calculator and send schedule IHT430 with the IHT400 (IHTM45001).
- Remember the test is per component, and joint property often needs a merger election.
- Recheck the test when values change, since a fixed legacy that passed on estimated values may fail on final ones.
- Where quick succession relief also applies, section 141A apportions it by reference to tax on each component (IHTM45050). See quick succession relief.
For the underlying thresholds see our pages on the nil rate band and 2026 to 2027 rates and thresholds.
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Related Accountapedia entries
- How inheritance tax is calculated on an estate
- Who bears the IHT: tax free legacies and the residue
- Taper relief on lifetime gifts
- Excepted estates: when no IHT400 is needed
- Giving assets away now or leaving them in your will
Sources
- legislation.gov.uk: Act 1984 c. 51, schedule 1A
- GOV.UK: Manual page IHTM45001
- GOV.UK: Inheritance tax
- GOV.UK: Manual page IHTM45005
- GOV.UK: Manual page IHTM45006
- GOV.UK: Manual page IHTM45007
- GOV.UK: Manual page IHTM45004
- GOV.UK: Manual page IHTM45009
- GOV.UK: Manual page IHTM45010
- GOV.UK: Manual page IHTM45011
Reviewed by Christine Anderson, Broker, Solar Protect. Last reviewed 8 October 2026. Part of Accountapedia, the Solar Protect guide to UK tax and accounting. This page is general information, not personalised advice.