Inheritance tax: More families opt for '100% tax free gifting' option to cut bill ahead of Reeves's pension raid

Families donated a record £1.1billion to charities through wills, taking advantage of rules that reduce inheritance tax bills. More than half of these donations were over £1million, with the value of such donations increasing by a third compared to the previous year, according to TWM Solicitors.

The surge in charitable giving comes as taxpayers look for ways to minimise their exposure to inheritance tax, with donations remaining completely exempt regardless of value.

The nil-rate band is set at £325,000, and the residence nil-rate band is £175,000, both lasting until 2030. Inheritance tax is 40 per cent on anything above these amounts.

However, donations to UK charities are exempt from inheritance tax, with charities receiving around £4bn in legacies each year.

About half of these charitable legacies come from taxable estates, where donors use the tax incentive to leave money tax-free rather than paying 40 per cent in tax.

In the autumn Budget, Chancellor Rachel Reeves introduced key changes, including limitations to agricultural and business property relief from April 2026, and the inclusion of unspent pension pots in inheritance tax calculations from April 2027.

Rachel Steeden, head of legal at Stewardship explained to GB News that with the new pension changes, people who previously thought inheritance tax wouldn't be an issue now need to reconsider their position.

She gave an example: "If you're someone who owns a home in the south east of England and you've got a pension pot which might be unspent, you may have previously thought that the nil rate band and the residents nil rate band would pretty much take care of your estate once you die, and inheritance tax wasn't going to be a big issue.

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"Well, now, suddenly the picture looks a little bit different because your pension pot is going to come into IHT. And so you do need to think about inheritance tax, perhaps for the first time.

"In effect, you've got a choice for the amounts that are above the nil rate band. Would you like to leave £100 out of that £100 to charity, or £60 out of the £100 to your family members?"

Charitable donations can reduce the value of an estate to below the £325,000 tax-free threshold, potentially eliminating inheritance tax liability entirely while benefiting good causes.

Another key incentive for charitable giving is the reduced inheritance tax rate of 36 per cent. Britons who who leave at least 10 per cent of their taxable estate to charity can see a four per cent reduction to the rest of their estate.

This reduction from the standard 40 per cent rate provides an additional benefit for families considering philanthropic activities alongside providing for their heirs.

Charities may see an even larger increase in donations from farmers and business owners, particularly following the new £1million cap on agricultural and business property relief from April 2026.

These organisations may choose to prioritise legacy gifts to ensure their money benefits good causes rather than facing the new 20 per cent base rate.

Steeden said: "The tax incentives are important because it gets people thinking how generous can they be," highlighting how the combined benefits of tax relief and charitable impact influence estate planning decisions.

Laura Walkley, Deputy Head of Private Client at TWM, predicts an increase in charitable giving through wills following the recent Budget changes.

She said: "My gut instinct is that gifts to charity will rise as a result of the recent Budget and particularly in light of the changes announced to inheritance tax."

She notes that many high earners or high net worth individuals, whether with or without children, are choosing to leave money to causes close to their hearts.

Walkley emphasises the importance of correct will drafting to secure the intended tax benefits. She said: "The rules about gifting to charities in a will can be complicated, and it is important that wills are drafted correctly in order for the full benefit to be available.

"Simple errors can end up with the intended tax benefit not being achieved."