The 36% reduced rate of inheritance tax, introduced by the Finance Act 2012 and codified at Schedule 1A of the Inheritance Tax Act 1984, has done more for charitable bequests in the United Kingdom than any campaign run by a charity in the last fifteen years. The mechanism is simple. An estate that leaves at least ten per cent of its baseline value to a registered charity pays inheritance tax on the remainder at 36% rather than 40%. For an estate well over the nil-rate band, the rate reduction is large enough that the charity receives more, the residual beneficiaries receive more, and the only party worse off is the Exchequer.
It is the rare incentive that works on its merits. Solicitors recommend it because the maths is favourable. Donors choose it because the legacy is meaningful. Charities benefit because the residual rate reduction makes the gift cost less to the estate than its face value. From 6 April 2027, the threshold calculation that determines whether the ten per cent test is met becomes materially harder to satisfy — and the change has been almost entirely absent from coverage of the wider reform.
The arithmetic before April 2027
The baseline amount for the ten per cent test is, broadly, the estate's value after deducting the nil-rate band, debts, liabilities, and reliefs, but before deducting the charitable legacy itself. The estate qualifies for the reduced rate if the charitable legacy is at least ten per cent of this baseline.
A worked example clarifies. Consider an estate of £600,000, with no spouse exemption applicable and the full £325,000 nil-rate band available. The taxable estate is £275,000. The ten per cent baseline test requires a charitable legacy of at least £27,500. The donor leaves £27,500 to a registered charity. The remainder of the estate, £247,500, is then taxed at 36% rather than 40%. The Exchequer receives £89,100 instead of £99,000; the charity receives £27,500; the residual beneficiaries receive £483,400 instead of £476,000. The reduced rate has produced a net £7,400 increase to the family beneficiaries at no cost to anyone except the Treasury.
Before April 2027, an unused pension pot held in trust outside the estate did not affect this calculation at all. The pension passed separately, free of inheritance tax, to its nominated beneficiaries. The ten per cent test applied only to the non-pension estate.
What changes from April 2027
From the implementation date, the pension's value is added to the estate for the inheritance tax calculation as Notional Pension Property. The baseline amount for the ten per cent test rises accordingly. The required charitable legacy to qualify for the reduced rate rises with it.
Take the same household, now with an additional £500,000 unused pension pot. Pre-2027, the calculation is as above: £27,500 legacy threshold, £275,000 taxable estate, reduced rate available with a £27,500 charitable gift. Post-2027, the pension's value joins the estate. The new baseline is £600,000 plus £500,000 minus the £325,000 nil-rate band — £775,000. The ten per cent test now requires a charitable legacy of £77,500 to qualify, not £27,500.
The pension's value enters the calculation, the baseline rises, and the gift required to keep the discount triples.
For estates where the reduced rate was being used precisely because the charitable gift cost less than it returned, the new arithmetic invites recalculation. The same gift no longer qualifies. To qualify, the gift must grow. The gift growing changes the residual to beneficiaries. The total tax saving against the increased gift no longer always favours the reduced rate route.
The structural detail nobody is talking about
Three structural points are worth surfacing for advisers.
The first is that the pension pot itself cannot be the source of the charitable legacy in a way that satisfies the test. A pension nominated to charity passes under the existing charity exemption — it is not part of the baseline amount, because exempt transfers are deducted before the calculation. The legacy has to come from the rest of the estate. A donor who plans to leave their unused pension to a registered charity already qualifies for full exemption on that allocation; what they still have to organise, if they want the reduced rate to apply, is the non-pension portion of the gift.
The second is that the change interacts with the residence nil-rate band taper. For estates approaching the £2 million threshold, the additional pension value can push the estate over the taper. The RNRB shrinks. The baseline for the ten per cent test changes again. Two moving parts that previously moved separately now move together, and they move against the donor.
The third is that drafting a will in cash terms — 'I leave £27,500 to X charity' — becomes substantially less robust than drafting in percentage terms. A cash legacy that satisfied the ten per cent test in 2025 may fail it in 2030, even with no change to the household, because the pension grew. A percentage legacy — 'I leave such part of my estate as equals ten per cent of the baseline amount for Schedule 1A purposes to X charity' — survives the arithmetic shift. The Society of Trust and Estate Practitioners has long recommended percentage drafting; the new rules make the recommendation harder to ignore.
What charities are not saying yet
Most major UK charity legacy teams have not yet publicly modelled the reform's impact on their bequest pipelines. The reasons are partly tactical — charities are reluctant to publish anything that might be read as advising donors to reduce gifts — and partly structural, in that the cohort of estates that use the reduced rate is small relative to the total population of charitable bequests, and even smaller relative to the charities' fundraising channels.
But the cohort matters. Reduced-rate estates skew toward larger gifts. A handful of well-structured Schedule 1A estates frequently constitutes a meaningful share of a charity's annual legacy income. The change in the test arithmetic does not automatically reduce gifts; it does, however, introduce a recalculation moment in which the donor's solicitor will run the new numbers. Some of those recalculations will reduce the gift. Others will keep it the same. A smaller number will increase it. The aggregate direction is genuinely uncertain — which is itself an unusual state for a tax reform with this much potential impact.
What advisers should do before April 2027
For estates with existing reduced-rate planning in place, two reviews are now overdue.
The first is a recalculation of the baseline under the new rules, factoring in the pension pot, and a comparison of the projected tax positions under the reduced rate and the standard rate. For estates where the gift no longer satisfies the test under the new baseline, the will needs to be updated to reflect either an increased gift (preserving the reduced rate) or a deliberate decision to forgo the reduced rate and revert to the standard 40%.
The second is a structural review of how the charitable legacy is drafted. Cash legacies that depended on the pre-2027 baseline should, in most cases, be converted to percentage legacies referenced explicitly to Schedule 1A. The drafting is well-established; the moment to apply it is now, before the household faces the recalculation in a less calm context.
Where the household had no charitable legacy in place but is now likely to breach the nil-rate band only because of the pension inclusion, the reduced rate becomes worth considering for the first time. For estates that pass the threshold by a modest margin, the ten per cent gift can produce a higher net to family beneficiaries than the unreduced rate, even after the gift. The calculation is dependent on the precise estate value relative to the band, but the case is worth running.
Coda
The reduced rate has been one of the cleanest examples of a tax incentive aligning donor, recipient, and Treasury interests. The April 2027 reform does not abolish it. It does, however, change the size of the gift required to access it, and it introduces an interaction with the pension pot that requires recalculation in every estate where the rule was previously being used.
For the donors involved, the recalculation is not a tax-planning exercise so much as a values exercise — what does the household want the charitable legacy to be, and how does the new arithmetic reshape the answer? The numbers will produce one answer. The values will produce another. The job of the adviser, for the next eighteen months, is to bring both into the same conversation.