Make sure you are donating to charity – not HMRC!
2nd July 2026
Posted in Articles by Adam Sedgwick
Leaving 10% of your net estate to charity reduces your Inheritance Tax (‘IHT’) rate from 40% to 36%, with the added bonus of the donation itself escaping tax. However, from 6 April 2027, due to the inclusion of pensions within the IHT estate, charitable donations could be costing your estate more than expected.
By restructuring how you make a charitable donation on death, you may be able to achieve a much better outcome for your beneficiaries.
Example
Barbara is recently widowed and has decided that on her death, she would like to leave 10% of her estate to charity, with the remainder to her two adult children, Denise and Anthony, both of whom are additional rate taxpayers.
Barbara dies in May 2028, aged 85 with an estate worth £2,800,000, of which £700,000 represents the value of her unused pension.
Ignoring the charitable donation for the moment, the IHT liability on her estate at 40% (after deducting two nil rate bands totalling £650,000) is £860,000, which is apportioned pro-rata between the free estate (£645,000) and the pension (£215,000).
This leaves net funds in the pension of £485,000, which will be subject to income tax at 45% on withdrawal from the pension by Denise and Anthony.
Overall, this leaves £1,721,750 of net cash for the beneficiaries.
How does the inclusion of the pension affect this calculation?
The charitable donation
HMRC released a technical note on 29 May 2026 in relation to IHT on pensions. This note confirmed that notional pension property will form part of the ‘general component’ of an estate for the purposes of calculating the baseline amount. This means it is essentially combined with the ‘free estate’ to calculate the level of donations required to meet the 10% test for gifts to charity.
As existing wills usually refer to the charitable payment as a percentage of the baseline, executors will find themselves directed by the will to make a much higher donation than was originally intended, to attract the lower rate. Prior to the introduction of IHT on pensions, the donation in the above example would have needed to be £145,000 ((£2.1m – £650,000) x 10%). With the inclusion of the pension, it now needs to be £215,000 to reduce the tax from £860,000 to £696,600.
Also, the beneficiaries of the will and the pension may be different. If it is difficult for the executors to coordinate payment from the pension, the free estate may end up funding all the donation, leaving even less for the will beneficiaries!
Conversely, there is a potential tax saving if the donation can be wholly made from the unused pension fund. This donation would deplete the value of the pension fund, which would otherwise be subject to income tax when withdrawn, rather than the free estate capital.
Anyone considering making a sizeable donation to charity on their death should keep a close eye on developments over the next 12 months. We expect more guidance to be released by HMRC on this topic as we approach April 2027.
Practical issues
There are practical challenges in that not all pension schemes will allow charitable donations. Nomination forms can be rigid, and some workplace schemes may not permit charities to be nominated at all, nor will they allow for a meaningful letter of wishes.
If there are any living dependants of the pension member, a charitable donation with the desired tax reliefs will not usually be possible.
Anyone considering planning of this nature should act now to check that their pension provider can give effect to their wishes, and that the intended charity is properly included as a nominated beneficiary. If not, consider transferring the pension to a provider that can. This needs to be dealt with during lifetime, as beneficiaries cannot redirect pension death benefits to charity after death.
Forbes Dawson view
From April 2027, pensions may become one of the least attractive assets for adult children to inherit, particularly where they are higher or additional rate taxpayers.
A charity, by contrast, can typically receive pension funds without suffering income tax, provided the necessary conditions are met. This may create a simple but powerful planning point: if a charitable gift is intended, consider making it entirely from the pension to preserve more of the free estate for the beneficiaries.
The key message is that pension nominations and wills should now be reviewed together. Otherwise, a well-intentioned charitable legacy could leave the family worse off than they need to be.
