For many individuals, leaving a gift to charity in their will provides an opportunity to support a cause that matters to them while also reducing the inheritance tax (IHT) liability on their estate. However, changes to the IHT treatment of pensions that will apply to deaths on or after 6 April 2027 could produce outcomes that weren’t anticipated when the will was made.
This blog explores the IHT benefits of charitable legacies, how the forthcoming pension changes will interact with the 10% charitable giving test, and why individuals with pension wealth and charitable gifts in their wills should consider reviewing their arrangements.
Gifts to charity under a will: The IHT benefits
Charitable gifts made on death can be an effective IHT planning tool. Gifts to qualifying charities are free of IHT.
In addition, leaving at least 10% of an estate to charity can, where the relevant conditions are met, reduce the rate of IHT applying to the remainder of the estate from 40% to 36%.
A summary of the 10% test
An estate is split into three components, which are looked at separately when applying the 10% test and determining whether the reduced rate of IHT applies. Broadly speaking, these components are:
Survivorship component – jointly owned assets held as joint tenants
Settled property component – certain trust property treated as part of the estate
General component – broadly, all other assets in the free estate, including solely owned assets and interests in jointly owned assets held as tenants in common
Why pensions matter from 6 April 2027
Most unused pension funds are currently outside a person's estate for IHT purposes. However, for deaths on or after 6 April 2027, most unused pension funds and pension death benefits will be included in the estate for IHT purposes.
In the context of charitable giving, the government has confirmed that pension wealth will form part of the general component of the estate under the new rules.
This could have important consequences for estates with pension wealth and charitable giving. In particular:
A fixed charitable legacy that currently enables an estate to satisfy the 10% test may no longer be sufficient to secure the reduced 36% rate of IHT.
Where a will contains a formula-based charitable legacy, the inclusion of pension wealth in the general component could increase the amount passing to charity and reduce the amount passing to other beneficiaries, potentially producing a result that no longer reflects the testator's intentions.
The impact of this change can be illustrated by a simple example. For simplicity, this example assumes that the charitable legacy is calculated as 10% of the value of the general component, without taking account of other reliefs, exemptions or allowances that may affect the statutory calculation:
Alison’s will leaves a charitable legacy designed to qualify her general component for the reduced rate of IHT, with the remainder of her estate passing to her husband, Brian. She has a free estate worth £700,000 and a pension fund worth £400,000.
Under the current rules, the pension isn’t included in the general component. The charitable gift is therefore £70,000, leaving £630,000 of the free estate to pass to Brian.
From 6 April 2027, Alison’s £400,000 pension fund is brought into the general component for the purposes of the 10% test. This increases the general component to £1.1 million and increases the charitable gift to £110,000. As a result, Brian receives £590,000 from the free estate under the will, rather than £630,000. The £400,000 pension remains separate from the assets passing under the will and will pass to the pension beneficiaries in accordance with the pension scheme arrangements.
This example illustrates how the inclusion of pension wealth in the general component can alter the division of an estate under a will, even though the pension benefits themselves will generally continue to pass in accordance with the pension scheme arrangements rather than under the will.
Under the new rules, pension death benefits paid to a qualifying charity can count towards the 10% charitable giving test for the general component, whether the charity is nominated by the deceased or receives the benefit following the scheme’s discretionary process. It will therefore be important to consider wills and pension nominations together when seeking to combine charitable giving with tax-efficient succession planning.
A good time to review existing wills and pension nominations
Further guidance and supporting materials from HMRC are expected ahead of the changes taking effect on 6 April 2027.
The forthcoming changes provide a timely reminder to review both wills and pension death benefit nominations. This is particularly important for individuals with significant pension wealth and charitable legacies in their wills, as the new rules may affect both the availability of the reduced rate of IHT and the proportion of wealth ultimately passing to charity and other beneficiaries.
A careful review now can help ensure that existing arrangements continue to achieve the intended balance between tax efficiency, charitable giving and succession planning objectives.
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