Reduced Rate of Inheritance Tax

Reduced Rate of Inheritance Tax

 A person can leave up to £325,000 to friends and family free of inheritance tax, but any excess above this figure may be subject to inheritance tax at a rate of 40%.  This allowance, called the “nil rate band”, relates to the amount left to beneficiaries other than a spouse (or registered civil partner) or charities.   Assets that pass to spouses (or registered civil partners) or charities are free of inheritance regardless of what those assets are worth.

There has recently been a change in the law to provide that if you leave to charity at least 10% of that part of your estate that would otherwise be chargeable to tax, the rate of inheritance tax should be reduced to 36%.   However, the provisions only apply on death and are complicated.   In particular, in calculating the 10%, you ignore that part of the estate that is covered by the nil rate band.

If you wish to do so, you can include a clause in your will to provide that 10% of your estate (or more) should pass to one or more named charities.   However, the rules are not straightforward, and any such clause needs to be carefully drafted.

If someone has died on or after 6 April 2012 and the beneficiaries under the will wish to take advantage of the lower rate, they can give the necessary extra money out of the funds they receive from the estate to charity.  However, in order to take advantage of the reduced rate, they also need to sign a document known as a deed to provide that for inheritance tax purposes the extra money should be deemed to have been paid directly out of the deceased’s estate.   In that way, the estate will then become eligible for the reduced rate of inheritance tax.

If you require further information on this topic, please contact us at

For more general information about inheritance tax, please visit “Wills and estate planning – inheritance tax planning”.

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