Since April 2012, the inheritance tax (IHT) regime has offered a reduced 36% rate where at least 10% of the estate is left to charity. The 10% to charity rule can, when structured correctly, increase what family beneficiaries receive while still delivering a meaningful charitable legacy. This article explains the core mechanics of the rule, highlights common traps, and sets out practical drafting points for wills and estate administration.
What Is the 10% to Charity Rule?
- Standard IHT applies at 40% on the value of the estate above the available nil rate band (NRB) and any other reliefs.
- If a qualifying charitable donation is at least 10% of the baseline amount for a component of the estate, the rate for that component falls from 40% to 36%.
A qualifying charitable donation must meet statutory requirements, and the calculation for the 10% to charity rule depends on identifying the correct baseline amount for each estate component. The rule appears in Schedule 1A IHTA 1984 and interacts with the general charitable exemption in section 23.
How the 10% to Charity Rule Works in Practice
The 10% test is not measured against the gross estate or residue. It is calculated per component, with the estate divided as follows:
Estate Components
- Survivorship component – assets passing by survivorship (e.g., joint tenancy)
- Settled property component – assets subject to a qualifying interest in possession
- General component – all other assets in the deceased’s estate for IHT
Baseline Amount (Per Component)
For each component, in simple terms the baseline amount is broadly calculated as:
- Net value after debts
- Minus exemptions, reliefs, and the component’s share of the NRB (but not the residence NRB)
- Then adding back in the value of assets qualifying for the charitable exemption in that component
Key Consequences
- The 36% rate may apply to one component but not to others.
- Executors and trustees may make elections to merge components or apply the reduced rate.
Example
In this example we will have a general component only.
- Net free estate: £900,000
- Charitable legacy: £60,000
Step 1: Chargeable transfer
£900,000 − £60,000 = £840,000
Step 2: Deduct NRB
£840,000 − £325,000 = £515,000
Step 3: Add back charitable legacy
£515,000 + £60,000 = £575,000
Outcome
- Baseline = £575,000
- 10% threshold = £57,500
- Donation = £60,000 → reduced 36% rate applies.
This simplified example illustrates how the 10% to charity rule applies where the estate consists solely of the free estate. Real‑world cases are rarely this straightforward.
Key Drafting and Planning Points
When advising clients on the 10% to charity rule, there are a number of key planning areas to consider.
Formula Clauses
Asset values and estate composition can shift significantly between drafting and death. If the intention is to secure the 36% rate, consider including a clause gifting “the amount required to meet the 10% test”. This avoids needing to keep the will on constant review, however:
- The final charitable sum is unknown until administration.
- Executors may need to recalculate multiple times during the administration.
The exact calculation for the executors may also be complicated, but generally the benefit of obtaining the lower rate of IHT may outweigh these disadvantages.
Interaction with IPDI Trusts
Where an IPDI is used on first death, the survivor’s estate will have both a general component and a settled property component. A formula clause in the will usually only applies to the general component and therefore the 36% rate only applies to the general component with the 40% rate applying to the settled property component.
In this types of case, either the formula clause needs extending to also be large enough to cover 10% of the settled property component (noting that this leads to more from the general component passing to charity, which may be relevant if the two components have different beneficiaries) or another formula clause should be included within the terms of the IPDI, ensuring that 10% of the baseline from the settled property component also passes to charity. This will lead to more complicated drafting, but would be necessary to ensure the lower rate of IHT applies to all components.
Survivorship Assets
The survivorship component requires specific attention. As with above, a formula clause generally will only apply to general component. Either a formula clause will need to be large enough to also cover 10% of the survivorship component, it may be necessary for the beneficiary of an asset under survivorship of a joint tenancy to complete a variation to benefit from the lower rate of IHT over the survivorship component
Conclusion
When planned properly, the 10% rule delivers a rare win‑win: more to charity and a lower overall IHT bill. Clear drafting and early calculations are the key to making it work.
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