Taxpayers should make greater use of charitable giving to reduce their inheritance tax (IHT) bills and leave more of their estates to next of kin, according to Price Bailey, the Top 40 accountancy firm.
According to the firm, IHT liabilities are set to rise for many families in the UK due to a combination of threshold freezes and relief reductions.
Price Bailey explains that the nil-rate band (£325,000), the portion of a person’s estate that is not subject to IHT, and the residence nil-rate band (£175,000), an additional inheritance tax allowance that applies when a person leaves their home – or a share of It – to direct descendants, have been frozen until April 2030. As property values and asset prices rise, more estates are being pulled into the IHT net – a process called “fiscal drag”.
In addition, reliefs like Business Property Relief (BPR) and Agricultural Property Relief (APR) will be capped at £1 million per individual from April 2026, according to Government proposals. Any qualifying assets above that threshold will only receive 50% relief, rather than 100% previously. The Government has also hiked IHT on AIM shares and proposes to include unused pension funds in the IHT calculation from April 2027.
Price Bailey points out that bequests made to charities in wills are exempt from IHT and if taxpayers leave 10 percent or more of their estates to charity, the rate of IHT applied to their estates is reduced from 40 percent to 36 percent, which can increase the amount left to next of kin.
Michael Morter, Private Client Tax Director at Price Bailey, comments: “Charities are concerned about people reducing their charitable giving as a result of their increased exposure to IHT. It sounds counterintuitive but taxpayers should be considering altering bequests to charities in their wills, as increased giving can sometimes mean more goes to next of kin and to charity.”
“Charitable giving as an IHT mitigation strategy is often underused. Many people focus on more familiar tactics like lifetime gifts, using trusts, or leveraging business and agricultural reliefs. The 10% charitable legacy rule, which reduces the IHT rate from 40% to 36% on the rest of the estate, is frequently overlooked.”
He adds: “There is a significant portion of estates where the opportunity is missed partly because there is a misconception that giving to charity necessarily means giving less to family.”
Scenario: £1.55 million estate
Assumptions:
- Nil-rate band (NRB) + residence NRB = £500,000
- No debts or lifetime gifts
- Beneficiaries are direct descendants (not a spouse/civil partner)
- Bequests to charity in Will are £60,000
- Estate includes a qualifying residence
Option 1: Current charitable gift
- Taxable estate = £1.55m – £500k – £60k = £990k
- IHT @ 40% = £396,000
- Family receives = £1,094,000 and charity receives £60,000
Option 2: increased charitable gift, lower IHT rate, more for family
By gifting £120,000, and assuming the baseline amount calculated includes liabilities or admin deductions, such as executor fees, pushes the threshold low enough that £120k is 10%. In this scenario, the family gets £1,200 more —and the charity receives more.
- IHT rate drops to 36%
- IHT = £930k × 36% = £334,800
- Family receives = £1.55m – £120k – £334k = £1,095,200
- Charity receives = £120,000
