Our earlier blog on pension IHT changes and charitable gifts looked at how charitable gifts on death can be used as an effective inheritance tax (IHT) planning tool. Where the relevant conditions are met, the rate of IHT applying to part or all of an estate can be reduced from 40% to 36%.
Broadly, the reduced rate can apply where at least 10% of the relevant net component of an estate is left to qualifying charity. One of the interesting features of the relief is that, where someone is already planning to leave around 4% of the relevant amount to charity, increasing the gift to 10% can potentially leave their other beneficiaries in broadly the same position because of the resulting IHT saving.
What is the relevant amount?
An important part of the rules is identifying the assets to which the 10% test applies.
Currently, an estate is divided into three components for these purposes:
The survivorship component, covering certain jointly owned property passing by survivorship
The settled property component, covering certain trust interests treated as part of the deceased's estate
The general component, which broadly captures the remaining property in the estate
The 10% test generally applies to each component separately, although components can, in certain circumstances be merged.
This became significant following the changes to the IHT treatment of pensions.
From 6 April 2027, most unused pension funds and pension death benefits, referred to in the legislation as “notional pension property”, will be brought within a deceased pension scheme member's estate for IHT purposes.
Why was this a problem?
Without a further change to the charitable giving rules, the pension reforms could have significantly increased the value of the general component of some estates.
This created a particular concern for existing wills containing charitable gifts designed to secure the 36% rate.
For example, a fixed charitable legacy which the testator expected comfortably to satisfy the 10% test might no longer have been sufficient once a substantial pension was included. Conversely, a formula gift drafted to give exactly the amount necessary to obtain the reduced rate could have produced a considerably larger charitable gift than the testator originally contemplated.
What has changed?
The Autumn Budget 2026 has addressed this interaction by announcing a separate pension component for the purposes of the charitable giving rules.
The effect is that relevant pension property will not simply increase the general component when determining whether the charitable giving condition for the 36% rate is met. Instead, it will by default be treated separately.
This should substantially reduce the risk of the pension IHT reforms unexpectedly altering the operation of existing charitable legacies.
Where appropriate, the pension component can also be combined with another component when applying the charitable giving rules, giving personal representatives greater flexibility in determining whether the requirements for the reduced rate are satisfied.
Is there anything to do now?
The change is welcome, but it does not remove the need to review existing will planning.
Anyone who has made, or is considering making, a significant charitable gift in their will should consider how the gift is drafted, which parts of their estate they intend the 36% rate to apply to, and how their will planning interacts with their pension arrangements and wider succession strategy.
With the pension IHT changes taking effect for deaths on or after 6 April 2027, now is a sensible time to review existing arrangements.
If you would like to discuss what the Autumn Budget 2026 changes could mean for your will, charitable giving or wider estate planning, please get in touch with our private client team.
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