Taxation (UK) · The use of exemptions in deferring and minimising inheritance tax liabilities

Exempt Transfers on Death and the 36% Charity Rate

Updated 11 October 2026 · Fact-checked

On death, assets left to a spouse or civil partner, or to a UK charity, are exempt from inheritance tax. If the charity gift is at least 10% of the baseline amount (net estate less exemptions other than charity, less the nil rate band), the tax rate on the chargeable estate falls from 40% to 36%.

Understand Exempt Transfers on Death and Charitable Gifts

Inheritance tax (IHT) on death is charged on the death estate: everything the person owned, less debts and funeral costs. Some transfers made on death are exempt. They are left out of the chargeable estate, so no tax arises on them.

Two exemptions matter most here. The spouse (or civil partner) exemption removes assets left to a spouse or civil partner. In exam questions it is normally unlimited. The charity exemption removes assets left to a qualifying UK charity. It is also unlimited. Exempt gifts waste no nil rate band, because the band is only used against the chargeable part of the estate.

The death rate is normally 40% on the amount above the nil rate band (£325,000). The residence nil rate band (£175,000) can also be deducted where the home passes to direct descendants. Lifetime gifts made in the previous seven years can use up the nil rate band first.

There is a reward for generous charity gifts. If the charity receives at least 10% of the baseline amount, the rate on the chargeable estate is 36% instead of 40%. The baseline amount is the estate after deducting exemptions other than the charity gift, and after deducting the available nil rate band. You do not deduct the residence nil rate band, and you do not deduct the charity gift itself.

The test is all or nothing. Meet 10% and the whole chargeable estate is taxed at 36%. Miss it by £1 and the rate stays at 40%.

Key rules to remember

Spouse exemption: Transfer to spouse or civil partner on death = exempt; Unlimited in standard exam questions. Exempt assets are removed from the chargeable estate.
Charity exemption: Transfer to a qualifying UK charity on death = exempt; Unlimited. The gift reduces the chargeable estate but the nil rate band still applies to what remains.
Baseline amount: Baseline = net estate − exemptions other than charity − available nil rate band; Do not deduct the charity gift. Do not deduct the residence nil rate band. Available nil rate band is £325,000 less any used by lifetime transfers.
10% test: Charity gift ≥ 10% × baseline amount → rate of 36%; If the gift is below 10% of baseline, the rate is 40%.
Chargeable estate: Chargeable estate = net estate − spouse − charity − nil rate band − residence nil rate band (if available); Tax = chargeable estate × 36% or 40%. Use the nil rate band left after lifetime transfers.
IHT rates: Death rate 40%; reduced rate 36%; nil rate band £325,000; residence nil rate band £175,000; The nil rate band, the residence nil rate band and the 40% death rate are given in the ACCA tax rates and allowances for Finance Act 2025. The 36% charity rate and the 10% baseline test are not listed there, so you must learn them.

How to solve Exempt Transfers on Death and Charitable Gifts questions

Use the same order every time. The key is to work out the 10% test before you choose the rate.

1List the death estate and deduct debts and funeral costs to get the net estate.
2Identify the gifts to a spouse or civil partner and to charity. Mark them exempt.
3Work out the available nil rate band: £325,000 less any used by chargeable lifetime transfers and PETs in the seven years before death.
4Calculate the baseline amount: net estate less exempt gifts other than charity, less the available nil rate band. Do not deduct the charity gift or the residence nil rate band.
5Compare the charity gift with 10% of the baseline amount. If it is equal or higher, use 36%. If not, use 40%.
6Calculate the chargeable estate: net estate less spouse gifts, charity gifts, nil rate band and any residence nil rate band.
7Multiply the chargeable estate by the chosen rate to get the IHT. Show the 10% test clearly so you earn the method marks.

Quickest way: Baseline first, then the rate

When to use it: Use this when a question asks for the IHT on an estate with a charity legacy, or asks whether the 36% rate applies.

Write down: estate, spouse gift, charity gift.
Baseline = estate − spouse − £325,000 (or the available band). Ignore charity.
Take 10% of the baseline and compare it with the charity gift.
Chargeable = estate − spouse − charity − nil rate band − residence nil rate band if applicable.
Tax = chargeable × 36% or 40%.

Common mistakes in Exempt Transfers on Death and Charitable Gifts

Deducting the charity gift when finding the baseline amount.
Students think exempt gifts are all deducted at the same stage.
Fix: Deduct spouse gifts and the nil rate band for the baseline, but leave the charity gift in. Deduct charity only when you compute the chargeable estate.
Deducting the residence nil rate band in the baseline amount.
Students treat both bands as one allowance.
Fix: Use only the nil rate band for the baseline. Deduct the residence nil rate band later, when finding the chargeable estate.
Using the full £325,000 when lifetime gifts have used part of it.
The lifetime gifts in the question are easy to overlook when focused on the charity.
Fix: Check the seven years before death. Use the nil rate band left after chargeable lifetime transfers and failed PETs, in both the baseline and the tax calculation.
Applying 36% only to part of the estate, or deciding the 10% test on the whole estate.
Students think the charity test applies in proportion, or compare the gift to the gross estate.
Fix: The test uses the baseline amount, not the gross estate. If met, 36% applies to the whole chargeable estate.
Treating a gift to a spouse as using up the nil rate band.
Students confuse exemption with taxable transfers at 0%.
Fix: Exempt transfers are outside the charge. The nil rate band is used only against chargeable transfers.
Assuming a charity gift always lowers the amount the family receives.
Students look at the gift alone and ignore the tax saved.
Fix: Compare after-tax amounts. Charity gifts reduce the taxable estate, and the 36% rate can reduce the tax further.

Worked examples

Example 1

Mia dies leaving a net estate of £800,000. She leaves £100,000 to a UK charity and the rest to her children. She made no lifetime gifts, and no residence nil rate band is available. Calculate the IHT payable.

Show the solution

Available nil rate band = £325,000 (no lifetime gifts).
Baseline amount = £800,000 − £325,000 = £475,000. No spouse gift exists, and the charity gift is not deducted.
10% of baseline = £47,500.
Charity gift of £100,000 is more than £47,500, so the 36% rate applies.
Chargeable estate = £800,000 − £100,000 (charity) − £325,000 (nil rate band) = £375,000.
IHT = £375,000 × 36% = £135,000.

Answer: IHT payable is £135,000, at the reduced rate of 36%. At 40% it would have been £150,000.

Example 2

Omar dies with a net estate of £1,200,000, including a home worth £500,000. He leaves £300,000 to his wife, £60,000 to a UK charity and the rest, including the home, to his children. He made no lifetime gifts. Both nil rate bands are fully available. Calculate the IHT payable.

Show the solution

Exempt: £300,000 to spouse and £60,000 to charity.
Baseline amount = £1,200,000 − £300,000 (spouse) − £325,000 (nil rate band) = £575,000. Do not deduct charity or the residence nil rate band.
10% of baseline = £57,500.
Charity gift of £60,000 is at least £57,500, so 36% applies.
The home passes to children, so the residence nil rate band is £175,000. This is less than the £500,000 home value.
Chargeable estate = £1,200,000 − £300,000 − £60,000 − £325,000 − £175,000 = £340,000.
IHT = £340,000 × 36% = £122,400.

Answer: IHT payable is £122,400. At 40% it would have been £136,000, so the charity gift passes the 10% test by only £2,500.

Exam tips

Always show the baseline amount calculation as its own working. Marks are given for it even if a later figure is wrong.
Read the question for lifetime gifts. They reduce the nil rate band used in both the baseline and the tax computation.
Charity gift near 10% of baseline: calculate carefully. These questions are often built so that the test is only just passed or just failed.
In objective test questions, decide the rate first. Then compute chargeable estate × rate. Wrong rate means zero marks, as there are no part marks.
For constructed response answers, state the rule in a short sentence, such as 'Gift to charity is exempt', before showing the number. It earns easy marks.

Practice questions from The use of exemptions in deferring and minimising inheritance tax liabilities

Exempt Transfers on Death and Charitable Gifts: frequently asked questions

What is the 36% inheritance tax rate for charity?

It is a reduced death rate. It applies where at least 10% of the baseline amount is left to qualifying charities. The 36% then applies to the whole chargeable estate, instead of 40%.

How do I calculate the baseline amount?

Take the net estate. Deduct exempt gifts other than charity, such as gifts to a spouse. Then deduct the available nil rate band. Do not deduct the charity gift or the residence nil rate band.

Is a gift to a spouse on death always exempt?

In standard ACCA TX-UK questions, a gift to a spouse or civil partner on death is exempt without limit. A different cap can apply in limited cases where the spouse has no UK connection. Check the facts in the question.

Does the charity gift have to be 10% of the whole estate?

No. It must be at least 10% of the baseline amount, which is lower than the whole estate. The baseline strips out spouse gifts and the nil rate band, so the test is usually easier to pass than 10% of the gross estate.