Could Your Charitable Legacy Cost Your Family More Than You Think?

Many people want to leave something to charity when they die. It can be a meaningful way to support the causes that matter to them, and there are valuable Inheritance Tax (IHT) benefits too.

Currently, if you leave at least 10% of your net estate to charity, the IHT rate on the remainder can fall from 40% to 36%.

However, from 6 April 2027, most unused pension funds are due to be brought within a person’s estate for IHT purposes. For anyone with charitable gifts written into their will, that creates an issue that few have spotted.

Why this matters

Many wills were written when pensions sat outside of the IHT calculation.

Once pensions are included, the estate used to test the 10% charitable threshold can grow significantly. As a result, the amount that needs to pass to charity to secure the 36% rate may be far higher than originally intended.

A worked example

Imagine a widow with an estate worth £2.8 million, including a pension worth £700,000.

While the pension previously sat outside the estate, a charitable gift of around £145,000 may have been enough to meet the 10% threshold.
Once the pension is included, the required figure could rise to around £215,000.

These figures are illustrative and, for simplicity, ignore the residence nil-rate band.

That isn’t necessarily a problem if it reflects the person’s wishes. But it can mean a larger donation than intended, and less passing to the family.

The planning opportunity

There is a more efficient way to think about this.

Where death occurs after age 75, adult children inheriting a pension will pay Income Tax at their marginal rate, often 40% or 45%, when they draw on it.
From 2027, that pension may also be caught by IHT. The two charges together can push the effective tax rate above 60%, sometimes described as the “67% trap”.

A charity, by contrast, can receive qualifying pension death benefits free of Income Tax, provided the conditions are met. In broad terms, this route works where there are no surviving dependants and the charity has been nominated by the member.

That opens up a neater solution. Rather than funding the charitable gift from the non-pension estate, it may be possible to direct it from the pension instead. In the right circumstances, that preserves more wealth for the family while still fully supporting the chosen charity.

Don’t overlook the pension nominations

The key shift is that wills and pension nominations can no longer be considered in isolation.

A will may leave money to one set of beneficiaries while a pension is paid to another. From April 2027, the interaction between the two matters far more and the tax due on the pension will fall to your executors to report and pay.

It’s worth reviewing both your will and your pension nominations together if you have a sizeable pension, a potentially taxable estate, adult children as beneficiaries, or charitable intentions.

The Lexington View

Good estate planning is not simply about saving tax. It’s about ensuring your money reaches the right hands, at the right time, in the most efficient way possible.

The forthcoming pension changes bring both a risk and an opportunity. The risk is that an existing will quietly stops doing what you intended. The opportunity is that, with a little planning, you can support the causes you care about while keeping more within the family.

Important: Tax treatment depends on individual circumstances and may change. This article is for general information only and should not be relied upon as financial, tax or legal advice. Professional advice should be sought before making changes to your estate planning arrangements.

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