Families concerned about inheritance tax bills can reduce what they owe by giving more money to charity, according to calculations from investment group Fidelity. The mechanism works through a rule that lowers the inheritance tax rate from 40 per cent to 36 per cent if charitable donations reach at least 10 per cent of an estate's baseline value. Marianna Hunt, of Fidelity, says this approach allows people to support causes they care about while potentially reducing the tax paid on their estate, though she notes that many people are unaware of the 10 per cent rule despite knowing that charitable gifts are exempt from inheritance tax.
The timing of this guidance matters because the inheritance tax landscape is about to change significantly. From April 2027, pensions will be counted as part of estates and become liable to death duties for the first time. The Institute for Fiscal Studies predicts that by 2032 one in eight people will trigger an inheritance tax bill on their own death or on the subsequent death of their spouse or civil partner. Ian Dyall, head of estate planning at wealth management firm Evelyn Partners, describes this change as leaving families with a 'super-sized tax burden', warning that the scope of inheritance tax will increase dramatically and estates already facing bills could face even greater ones.
The current inheritance tax allowances are a £325,000 nil-rate band that can be passed on free of tax, plus an additional £175,000 allowance for family homes left to direct descendants such as children or grandchildren. Any wealth above these thresholds is subject to 40 per cent tax. To illustrate the impact, Fidelity modelled an estate worth £1 million with both allowances applied. Without charitable giving, the family would receive £800,000 after paying a £200,000 tax bill. However, if they donated £67,500 to charity (10 per cent of the baseline value), the tax rate would fall to 36 per cent, resulting in a £155,700 bill and allowing the family to receive £800,800.
Hunt emphasises that families should use qualified solicitors or will writers when structuring charitable gifts, as estate values may change between writing a will and death. Rather than specifying a fixed amount, wording can ensure donations meet the 10 per cent threshold regardless of how the estate grows. She notes that some charities offer free will-writing services, which could save around £500 on mirror wills for a couple, though such wills tend to be standardised and may not suit all families. Beyond charitable giving, other inheritance tax exemptions exist, including gifts made more than seven years before death, annual gifts of £3,000, parental wedding gifts of £5,000, and regular gifts from surplus income.
For UK savers and those planning their estates, the changes from April 2027 mean more families will face inheritance tax bills, making advance planning through charitable giving or other exemptions increasingly valuable to preserve wealth for their families.