Brits could use ‘highly effective’ estate planning tool to cut inheritance tax rate by 10%

Brits are being encouraged to consider a little-known inheritance tax (IHT) rule which could cut the inheritance tax rate by 10%. It comes as estate planning professionals report a rise in demand for their advice from worried families.

The trick to getting a reduced rate of inheritance tax is to leave some of your estate to a charity in your will.

The gift itself is exempt from inheritance tax. But if 10% or more of your net estate is left to charity, your loved ones will typically also qualify to pay inheritance tax at a reduced rate of 36%. That is a 10% saving on the normal IHT rate of 40%.

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Jude Dawute, managing director of financial planning firm Benjamin House, said: “It’s a simple, effective way to support meaningful causes while also lowering the IHT burden.”

Dawute gave an example:

“One client had an estate valued at £2.5 million, with a projected IHT bill of £460,000. By gifting 10% of their net estate (£225,000) to three registered charities through their will, they reduced their IHT rate to 36%, saving approximately £60,000 in tax,” he said.

“That £60,000 stayed within the family – while £225,000 went directly to causes they cared deeply about.” The IHT bill was lowered to £400,000.

We look at ways to reduce an IHT bill or avoid inheritance tax by giving gifts to loved ones in separate guides.

Inheritance tax changes trigger advice demand

Changes to inheritance tax rules – particularly the freezing of the nil rate band and the inclusion of unused pensions as part of the taxable estate from April 2027 – “are prompting more people to consider charitable legacies as part of their estate planning”, according to James Graham, wealth planner at Succession Wealth.

Almost all (92%) will writers, solicitors and financial advisers surveyed by Remember a Charity believe estate and tax planning will increase as new inheritance tax policies come into view in the next two years.

Six in 10 say they are already receiving more requests for advice, according to the poll of more than 200 estate planning professionals – and 65% say the charitable tax incentives will become even more important to their client base.

Tanya Watson, chartered tax adviser and senior director at Alvarez & Marsal Tax LLP, said: “The changes to IHT are prompting a fundamental reassessment of estate planning strategies, particularly among clients who may not have previously been impacted.

“Charitable giving can be a highly effective planning tool, and these changes provide a timely reason for advisers to revisit legacy plans with clients who may not have considered this route before.”

How can I set up a charitable legacy?

The most common and straightforward method of gifting to charity is through a person’s will. This allows individuals to leave a specific gift or a percentage of their estate to a named charity – which can also reduce the inheritance tax rate from 40% to 36% if at least 10% of the net estate is gifted.

For larger or more complex estates, charitable trusts may also be considered.

“These allow donors to allocate funds over time, often in line with particular aims or governance preferences, and can offer more flexibility – though they require more planning and administration,” said Dawute.

The financial adviser typically begins by calculating the client’s inheritance tax liability based on current asset values and allowances.

From there, they help structure a suitable balance between what’s passed on to family and what may be given to charity – optimising the estate’s value and the legacy it creates.

Some charities will help with will writing if you leave a legacy to them. For instance Macmillan Cancer Support offer a free will service, with the option to leave a percentage of your estate to them.

Graham said: “Many of my clients are motivated by a personal connection to a cause, for example, one client recently amended her will to leave a legacy to a local hospice that had cared for her husband.”

Things to consider when choosing a charitable legacy

Choosing a charitable legacy is often the most personal part of the planning. There are a few key considerations Dawute guide clients through:

• Connection: Does the cause reflect something meaningful in their life? For many, this could relate to a health condition, local community, or area of passion.
• Credibility: Is the charity well-managed and transparent with funds? Clients want confidence that their gift won’t be lost to inefficiencies or mismanagement.
• Continuity: Will the charity still exist or be relevant when the estate is settled? We sometimes suggest naming two or more organisations to prevent the gift failing entirely if one dissolves.

It’s important to speak to a financial planner and solicitor to ensure the will is structured properly, and to understand the impact on your estate and beneficiaries.

Graham said: “I always encourage clients to check the Charity Commission’s register to ensure their donation will be used as intended.

“And if you want your legacy to have an immediate impact, you might consider smaller charities which often have lower overheads than larger organisations.”