Charitable giving and inheritance tax: A strategic approach to estate planning 

Charitable giving has long been part of estate planning advice, but in the United Kingdom it carries particular appeal due to the way the Inheritance Tax (IHT) system is structured. By integrating charitable gifts into a will or your wider estate planning, individuals can reduce their tax burden, enhance the value passed to loved ones, and support causes they care deeply about. 

Gifts to charity are completely exempt from inheritance tax 

Under UK law, any gift to a qualifying charity, whether during lifetime or through a will, is fully exempt from IHT. This means: 

• Charitable legacies reduce the value of your taxable estate, and 

• The portion left to charity is taxed at 0% 

For individuals whose estate exceeds the standard £325,000 nil-rate band (and any applicable residence nil-rate band of up to £175,000), this exemption provides a clear tax benefit whilst supporting meaningful causes. 

What qualifies as a charity?  

For IHT purposes, the charity must be: 

• Registered with the Charity Commission for England and Wales, the Scottish Charity Regulator, or the Charity Commission for Northern Ireland, or 

• An equivalent qualifying charitable body recognised by HMRC, such as university or church 

Leaving 10% of your estate to charity reduces the IHT rate 

One of the most powerful incentives in the UK system is the reduced IHT rate for estates that leave at least 10% of the “net estate” to charity.  If this threshold is met, the standard 40% IHT rate falls to 36%. 

Depending on the estate’s size, this can create a win for everyone.  This is because the charity receives a substantial legacy, whilst the remaining estate may pay less overall tax – sometimes resulting in a larger net inheritance for family beneficiaries than if no charitable gift were made. 

Practical example: 

Consider an estate worth £1,000,000 (after deducting the nil-rate band): 

Without charitable gift: 

• Taxable estate: £1,000,000 

• IHT at 40%: £400,000 

• Net to beneficiaries: £600,000 

With 10% charitable gift: 

• Gift to charity: £100,000 

• Remaining estate: £900,000 

• IHT at 36%: £324,000 

• Net to beneficiaries: £576,000 

• Total distributed: £676,000 (charity + beneficiaries) 

In this scenario, the charity receives £100,000, beneficiaries receive £576,000, and the overall tax saving is £76,000 compared to the non-charitable scenario.  Please note, there is a formula to calculate the 10% required to quality.  Professional advice is essential here, as the calculation can be technical, but it can significantly enhance the overall tax efficiency of a will.  

Lifetime giving reduces the future IHT burden 

Charitable gifts made during lifetime are also exempt from IHT. Although lifetime gifts to individuals can remain partly taxable if the donor dies within seven years (known as “potentially exempt transfers” or PETs), gifts to charities are instantly and unconditionally exempt, regardless of timing. 

Types of lifetime charitable gifts include: 

• Cash donations 

• Quoted shares and securities 

• Land and buildings 

• Chattels, including artwork, antiques, and collectibles 

• Intellectual property 

This means: 

• Lifetime philanthropy immediately reduces the eventual size of the taxable estate, and 

• Donors may access income tax relief on certain gifts (e.g., Gift Aid contributions, which allow charities to reclaim basic rate tax, and higher rate taxpayers to claim additional relief) 

Additional income tax benefits: 

• Gifts of quoted shares and securities to charity attract income tax relief on the market value plus any associated costs 

• Gifts of land and buildings to charity similarly qualify for income tax relief 

This dual benefit makes charitable giving a flexible tool for both annual tax planning and long-term estate optimisation. 

Donating art and cultural objects to galleries and museums 

For individuals with significant art collections or cultural objects, donating to galleries and museums offers unique opportunities and benefits: 

Cultural Gifts Scheme: The Cultural Gifts Scheme allows individuals to donate pre-eminent works of art, manuscripts, archives, and other heritage objects to qualifying museums, galleries, libraries, and archives in return for a reduction in their tax liability. Benefits include: 

• A tax reduction equal to a percentage of the object’s value (currently 30% for IHT, income tax, or capital gains tax) 

• The object remains part of the national heritage 

• Donors may negotiate display credits or other recognition 

Acceptance in Lieu: The Acceptance in Lieu (AiL) scheme allows individuals to transfer important cultural objects to the nation in lieu of paying IHT. The object’s value is offset against the IHT liability, and objects are allocated to appropriate museums or galleries. This scheme is particularly valuable for: 

• Estates with significant IHT liabilities but limited liquidity 

• Objects of national importance that would otherwise be sold or exported 

Conditional exemption: Owners of heritage assets (including artworks, historic buildings, and land) may claim conditional exemption from IHT, provided they: 

• Maintain the asset in good condition 

• Allow reasonable public access 

• Keep the asset in the UK 

Upon sale or breach of conditions, the deferred tax becomes payable. However, if the asset is subsequently donated to a qualifying institution, the tax liability can be extinguished. 

Practical considerations for art donations: 

• Valuation: Independent professional valuation is essential and must be accepted by HMRC and the receiving institution 

• Acceptance criteria: Museums and galleries have acquisition policies and may decline gifts that don’t fit their collections 

• Costs: Donors typically bear costs of valuation, transport, and conservation assessment 

• Timing: The process can take several months, requiring advance planning 

Structuring philanthropy: foundations, donor-advised funds, and legacies 

For individuals seeking a lasting legacy or greater control over their philanthropy, various structures can be used: 

Charitable trusts and foundations provide long-term governance and can involve family members in grant-making decisions. They offer: 

• Perpetual existence (or for a defined term) 

• Control over charitable objectives and beneficiaries 

• A lasting family legacy 

• However, they require ongoing administration, regulatory compliance, and typically higher setup costs 

Donor-advised funds (DAFs) offer a simpler, cost-effective alternative with immediate tax benefits and ongoing flexibility. With a DAF: 

• Donors make an irrevocable gift to the fund and receive immediate tax relief 

• Donors retain advisory privileges over grant-making 

• The sponsoring charity handles all administration and compliance 

• Minimum setup costs and ongoing fees are typically lower than establishing a private foundation 

Practical steps for incorporating charitable giving into estate planning 

1. Identify your charitable objectives: Which causes matter most to you? Do you want to support specific organisations or broader causes? 

2. Review your estate: Obtain a realistic valuation and calculate potential IHT liability under current rules 

3. Model different scenarios: Work with your adviser to compare the tax and distribution outcomes of various charitable gift levels 

4. Consider lifetime giving: Evaluate whether lifetime gifts (with immediate tax relief) or testamentary gifts (potentially qualifying for the reduced 36% rate) are more suitable 

5. Choose the right structure: Decide whether outright gifts, a charitable trust, or a DAF best suits your circumstances 

6. Draft or update your will: Ensure charitable gifts are clearly expressed and properly structured to achieve your tax and philanthropic goals 

7. Communicate your intentions: Consider preparing a letter of wishes or discussing your plans with family members and the intended charitable beneficiaries 

8. Review regularly: Estate planning should be revisited periodically, particularly after major life events or changes in tax legislation 

Conclusion 

Charitable giving represents one of the most tax-efficient and personally meaningful aspects of estate planning in the UK. Whether through lifetime gifts, testamentary bequests, or sophisticated structures like charitable foundations, donors can significantly reduce IHT whilst creating a lasting positive impact.   

The reduced 36% IHT rate for estates leaving 10% to charity is particularly noteworthy – it can result in more value being distributed overall, benefiting both charities and family members. Combined with income tax reliefs on lifetime giving and specialised schemes for cultural property, the UK tax system actively encourages and rewards philanthropy. 

As with all estate planning, professional advice tailored to your specific circumstances is essential to maximise both tax efficiency and philanthropic impact. Contact Amy Lane or Michele Price today.