IHT: Lifetime charitable giving

A discount on the rate of Inheritance Tax (IHT) applies for deaths after 5 April 2012 where 10% or more of the net value of the estate is left to charity under the terms of a will. Charitable gifts can also be made during a donor's lifetime. Which is the most tax efficient for donor and donee? 

This is a freeview 'At a glance' guide to charitable lifetime giving.

At a glance

Where 10% or more of an estate is left on death to charity the estate will attract a 10% discount on the rate of IHT paid. This means it will attract IHT of 36% instead of 40%. The charitable gift itself is Exempt from IHT.

Donors may improve their charitable objectives by making a lifetime donation under Gift Aid. If a bequest is made during the donor's lifetime, both donor and recipient may be substantially better off.

For example

George has an estate worth £1 million just before his death. He never married and has no available nil rate band as a result of making lifetime gifts to his niece. He decides to gift at least 10% of his estate to charity. Compare tax relief if he makes his gift in life or on death.

If he makes a gift of £135,000 whilst alive, assuming that he pays sufficient Income Tax or Capital Gains Tax, his charity can reclaim £33,750 in tax under Gift Aid, and if he is a 40% taxpayer, he can also reclaim £33,750 making the net cost of his gift just £101,250 (approximately 10% of his estate as planned). The death value of his estate is £898,750 and IHT is £359,500.

If George leaves 10% of his estate on death this is £100,000 in return for a 10% discount in tax paid: tax due on £900,000 @ 36% = £324,000, however, the charity is now worse off to the tune of £68,750.

Result: Gift Aid v death bequest relief 

By Gift Aiding his cash donation before death, George saves £33,750 in Income Tax and his estate pays £359,500 in IHT so £325,750 of tax is paid in total.

By making a bequest on death George's estate pays £324,000 in IHT.

George's estate is £1,750 better off making a charitable donation by will, however, the position for the charity is in reverse. The charity will prefer George to donate under Gift Aid whilst alive in order to claim back tax under Gift Aid relief.

What's new?

Anti-avoidance for charity exemption

Announced at the Autumn Budget 2025 to keep in line with other taxes: 

• The IHT charity exemption now only applies to gifts made directly to UK charities and registered clubs. 
• Any gifts to trusts not meeting the required definitions of a charity or club will not be exempted.
• Draft legislation: Gifts to charities and clubs

From April 2026, the government will introduce changes to the rules on tainted donations, approved charitable investments and attributable income. 

• These changes will affect all charities, Community Amateur Sports Clubs (CASCs) and donors, and the agents and intermediaries who support them.

The tainted donations rules will move from a motivation-based test to an outcome-based test. 

• This will ensure that donors do not receive any financial benefit, direct or indirect, from giving to charities or CASCs.
• The test of 'financial advantage' will change to 'financial assistance', lowering the threshold for determining whether a donation is tainted.

The government recognises 12 investment types for charitable tax relief. 

• All 12 will now need to meet a single condition.
• The charity must make the investments for its own benefit and not for tax avoidance by any party.
• This update simplifies inconsistencies across the existing rules and prevents misuse of charitable investment reliefs for tax avoidance.

The definition of attributable income will now include legacies.

• As legacies may have already benefited from Inheritance Tax relief, charities and CASCs will need to use legacy funds for charitable purposes to avoid a tax charge. 
• This aligns the treatment of legacies with existing treatment of residual estate income and ensures charities direct legacy funds to their charitable purposes. 

These changes aim to prevent misuse of charitable tax reliefs and as such agents and organisations should now:

• Review donation structures and investment arrangements to ensure they meet the new rules.
• Identify, monitor and record legacy income and make sure legacy funds are used for charitable purposes.
• Prepare for updated guidance that HMRC will publish in April 2026.

Small print and links

Note that: these illustrations are fairly simplistic examples and in real life "George" might be paying tax at 45% which will make Gift Aid even better, and he might consider reducing IHT by using a range of different measures including making regular gifts out of income.

Gift Aid: How it works
What is Gift Aid? How does it work? What are the rules? 

Other Gifts to Charity
Gifts to Charity: can you obtain tax relief on a gift to your local charity or community amateur sports club? What about gifts to your church, mosque or synagogue? Do you need to be a taxpayer? Are there any tax reliefs?

Client Briefing: Making gifts & IHT
What gifts can you make without triggering Inheritance Tax (IHT)? What are the rules on making tax-effective gifts for IHT purposes?

IHT relief: 10% discount for charitable bequests on death
When does the 4% Inheritance Tax (IHT) rate reduction apply in respect of charitable bequests on death?

For further assistance on IHT, charitable donations or any other tax problem please contact the Virtual Tax Partner support service.