Leaving a Lasting Legacy, How Charitable Giving in Your Will Can Reduce Inheritance Tax

By Andrew Reed, Chief Client Services Officer, Wise Investment

For many of us, creating a Will is about ensuring our loved ones are looked after when we’re no longer here. However, a Will can also reflect the values that have shaped our lives, including supporting the charities and causes that matter most to us.

At Wise Investment, we regularly speak to clients about passing on wealth in the most tax-efficient way possible. While nobody should make charitable donations purely for tax reasons, it’s worth understanding that leaving money to charity in your Will can both create a lasting legacy and reduce the amount of Inheritance Tax (IHT) paid by your estate.

With frozen tax allowances, rising property prices and significant changes to pension taxation from April 2027, more families are likely to be affected by Inheritance Tax than ever before. As a result, reviewing your estate planning has become increasingly important.

Gifts to charity are free from Inheritance Tax

One of the most valuable reliefs within the UK tax system is the exemption for gifts to registered UK charities made through your Will.

Any amount left to a qualifying charity is deducted from your estate before Inheritance Tax is calculated. This means every pound gifted to charity is outside the scope of IHT.

For example, if your estate is valued at £900,000 and you leave £50,000 to charity, only £850,000 is considered when calculating the taxable value of your estate, before applying any available tax-free allowances.

This allows you to support causes close to your heart while reducing the value of your taxable estate.

The 10% rule, a little-known tax saving

Many people are unaware that charitable giving can also reduce the rate of Inheritance Tax itself.

Normally, IHT is charged at 40% on the taxable part of your estate. However, if you leave at least 10% of your net estate to charity, the rate of Inheritance Tax on the remaining taxable estate falls from 40% to 36%.

Although this may seem like a small reduction, it can save many thousands of pounds.

An example

Assume an estate has a taxable value of £1,000,000 after all available allowances have been used.

Without a charitable gift

• Taxable estate: £1,000,000
• Inheritance Tax at 40%: £400,000
• Beneficiaries receive: £600,000

Leaving 10% (£100,000) to charity

• Charity receives: £100,000
• Remaining taxable estate: £900,000
• Inheritance Tax at 36%: £324,000
• Beneficiaries receive: £576,000

In this example, the family receives only £24,000 less, yet the chosen charity benefits by £100,000. The reduction in tax means that a significant proportion of the charitable gift is effectively funded through the tax saving rather than entirely by the estate itself.

For clients who already support charities during their lifetime, this can be a highly effective way of continuing that support long after they have gone.

Why estate planning matters more than ever

Inheritance Tax has traditionally affected only a relatively small number of estates. However, that picture is changing.

The nil-rate bands have been frozen for several years while property values have continued to rise. In addition, from April 2027, unused pension funds are expected to form part of an individual’s estate for Inheritance Tax purposes under the Government’s proposed changes.

As a result, many people who have never considered themselves wealthy may find their families facing a larger tax bill than expected.

Reviewing your Will and estate plan regularly can help ensure your wishes are carried out while making full use of the reliefs and exemptions available.

Charitable giving should form part of a wider financial plan

Every family is different, and there is no one-size-fits-all solution.

For some, leaving a charitable legacy is about giving something back to an organisation that has supported them or their family. For others, it is about helping future generations through education, medical research or environmental causes.

Alongside charitable giving, a comprehensive estate plan may include:

• Reviewing your Will regularly.
• Making use of gifting allowances during your lifetime.
• Reviewing pension death benefit nominations.
• Ensuring assets pass to the right people in the most tax-efficient manner.
• Considering the impact of future tax changes on your family’s wealth.

These decisions are often interconnected, which is why taking professional advice can make a significant difference.

How Wise Investment can help

At Wise Investment, we believe good financial planning is about much more than investments. It’s about understanding what matters most to you and helping you make informed decisions that provide confidence for the future.

As an independent, employee-owned financial planning firm, we take pride in building long-term relationships with our clients. Whether you’re reviewing your Will, considering charitable giving, planning for retirement or looking to reduce the impact of Inheritance Tax, our advisers can help you create a plan tailored to your circumstances and your objectives.

If you haven’t reviewed your estate planning recently, now could be the right time to do so. A simple conversation today could help protect more of your wealth for the people and causes that matter most tomorrow.

About the Author

Andrew Reed is the Chief Client Services Officer at Wise Investment. With 30 years’ experience in financial services, Andrew oversees the firm’s client service, financial planning and administration teams. He works closely with clients and colleagues to deliver high-quality, independent financial planning, with a particular focus on tax-efficient strategies, estate planning and helping clients achieve their long-term financial goals.