The 36% Charitable IHT Rate on Property Estates: How the Sch 1A Test Works

Schedule 1A of the Inheritance Tax Act 1984 introduced the 36% reduced IHT rate from 6 April 2012 as an incentive for charitable bequests. The rule is straightforward in the headline: a bequest of 10% or more of a relevant component of the estate to a qualifying charity drops the IHT rate on that component from the standard 40% to 36%. The detail is less straightforward, and the consequence for a landlord estate above the £2,000,000 RNRB taper threshold is often counter-intuitive. Above a certain estate size, the 4% rate saving on the larger residual is close enough to the size of the charity gift itself that the family's net inheritance falls only modestly when a substantial bequest is made to charity. At some break-points the bequest is effectively self-funding for the family.

This page walks the Schedule 1A mechanics applied to landlord estates: the components-test that divides the estate into general, survivorship, and settled portions and tests each one separately; the baseline-amount calculation that the 10% threshold is measured against (not the gross component value); the merger election under Sch 1A para 7 that combines two or more components for the test where neither in isolation would meet the threshold; the choice between a specific-property bequest (a named BTL flat goes to the charity) and a residue-share bequest (10% of residue goes to the charity); the break-point analysis on a £2,400,000 worked landlord estate; and the deed-of-variation route under s.142 IHTA 1984 (covered in detail on our Wave 4 C5 page) for retro-engineering the 36% trigger after a death where the original will did not include a charitable bequest.

For the wider IHT planning lens that places the 36% rate within the menu of landlord-estate mitigations (lifetime gifts, FIC value-freeze, spouse exemption, deed of variation, charity legacy, life cover), see An IHT Decision Framework for UK Landlords.

The Sch 1A mechanic in one paragraph

Schedule 1A IHTA 1984 reduces the IHT rate from 40% to 36% on a "component" of the estate where at least 10% of the baseline amount of that component (broadly the component value after deducting available NRB and any reliefs, but before the charitable bequest) passes to a qualifying charity on death. The estate is divided into three components: the general component (the free estate, broadly the residuary estate under the will), the survivorship component (joint property passing by survivorship outside the will), and the settled component (settled property in which the deceased had an interest in possession). Each component is tested separately, except where the personal representatives elect under Sch 1A para 7 to merge two or more components into a single combined component for the test. The reduction applies only to the chargeable estate, not to the charitable bequest itself (which is separately exempt under s.23 IHTA 1984).

The rate saving (4 percentage points from 40% to 36%) is small in headline terms but compounds against the size of the chargeable residual after the charitable bequest. On a £1.5 million chargeable component after a £200,000 charitable bequest, the 4% rate saving is £52,000. The arithmetic is favourable for estates well above the available NRB and RNRB allowances, which describes most portfolio-landlord estates.

The components-test in detail

The three components and the typical landlord-estate composition:

• General component: the free estate passing under the will, excluding any property in joint ownership passing by survivorship and excluding any settled property. For a typical landlord estate, the general component includes the BTL portfolio (where held in the deceased's sole name), the deceased's share of the family home (where held as tenants in common rather than joint tenants), and the residuary cash, investments and chattels.
• Survivorship component: property held jointly with another person (typically the spouse) and passing automatically to the survivor outside the will under the rule of survivorship. For most landlord couples, this is the family home held as joint tenants, plus any BTL properties held jointly. The survivorship component is technically a transfer at death even though the will does not deal with it.
• Settled component: any settled property in which the deceased had an interest in possession at death (the right to income or use of the trust property for life). For most landlord estates this is empty (no life-interest trusts); for estates where the deceased had a life interest in a discretionary or interest-in-possession trust, the settled component value flows through to the IHT computation.

Each component is computed at the deceased's death and reported on the IHT400 estate return. The PRs identify which assets fall into which component and value each accordingly. The 10% test is then applied separately to each component unless the merger election is made.

The baseline amount: where the 10% test actually bites

The baseline amount for a component is defined in Sch 1A para 5 as the value of the component after deducting:

• The available nil-rate band attributable to the component (the NRB is allocated across the components in proportion to their value, per Sch 1A para 6).
• The residence nil-rate band (where the residence is in the relevant component, broadly the general component for sole-owned residences or the survivorship component for joint-tenant residences).
• Any other reliefs (BPR, APR, etc.) attributable to the component.

The baseline is computed BEFORE the charitable bequest itself. The 10% test compares the value of the charitable bequest from that component to the baseline. Three numerical illustrations:

• £1,000,000 general component, £325,000 NRB available, no other reliefs. Baseline = £675,000. 10% test = £67,500. A charitable bequest of £67,500 (from this component) qualifies the component for the 36% rate.
• £600,000 survivorship component (joint family home), no NRB attributable (all NRB sits against the general component), £175,000 RNRB attributable. Baseline = £425,000. 10% test = £42,500. A charitable bequest of £42,500 from this component would qualify it for 36%, but the survivorship component cannot make a charitable bequest by definition (it passes by survivorship); so the survivorship component as standalone is rarely the route to the 36% rate.
• £2,000,000 general component, £325,000 NRB plus £325,000 transferred NRB available, £350,000 RNRB available. Baseline = £1,000,000. 10% test = £100,000. A charitable bequest of £100,000 from this component qualifies it for the 36% rate.

The baseline shrinks as the available allowances grow, so the 10% threshold becomes proportionally smaller. For an estate near the threshold of paying IHT at all (where the NRB and RNRB consume most of the component), the absolute threshold is small but the rate saving is also small. For estates well above the threshold, the absolute threshold is larger but the rate saving compounds against the larger residual.

The merger election: combining components

Schedule 1A paragraph 7 lets the PRs elect to merge two or more components into a single combined component for the 10% test. The election is useful in two main scenarios:

One, where one component meets the 10% test and the other does not, and the family wants the 36% rate to apply to the larger combined base. Without the merger election, only the component meeting the test gets the 36% rate; with the merger, both components qualify if the combined charitable bequest meets the combined-baseline 10% threshold. The election trades flexibility (separate components rated separately) for breadth (combined component all at 36%).

Two, where the testator's will leaves a charitable bequest from one component (typically the general component, since that is what wills usually deal with) but the estate's joint property (survivorship component) is also substantial. Without the merger, only the general component benefits from the rate reduction. With the merger, the joint property at the survivorship component also drops to 36%. For a couple with substantial joint-tenant ownership of the family home and other property, the merger election can apply the rate to a much larger total chargeable base.

The election is made by the PRs on the IHT430 claim form alongside the IHT400 estate return. It is irrevocable for the death in question; the PRs cannot reverse the election if the family later prefers components to have been tested separately. The election should be modelled before it is made: PRs compute the total IHT under both alternatives (separate test and merged test) and select whichever produces the lower total IHT for the family.

Specific-property bequest vs residue-share bequest

Two structurally different ways to leave a charitable bequest in a will:

• Specific-property bequest: "I give my BTL flat at 12 Acacia Avenue, Reading, to the National Trust." The charity takes the named asset at probate; the executors transfer legal title; the bequest qualifies for s.23 exemption and contributes its market value to the 10% test on the relevant component. Pros: certainty of asset identity, clear gift to the charity, well-suited to a property the testator wants to direct toward a specific cause. Cons: valuation contention at probate (the executors and HMRC may disagree on the market value, with consequences for both the 10% test and the s.23 exemption), and the charity may want to sell the property which it is entitled to do but which may not match the testator's intent.
• Residue-share bequest: "I give 10% of the residue of my estate to the National Trust." The charity takes a percentage of whatever is left after specific legacies, debts, expenses, and other gifts have been satisfied. Pros: administrative simplicity, automatic scaling to the actual estate size at probate, no specific-asset valuation question. Cons: the actual charity bequest can be smaller than the testator intended if the residue is depleted by other legacies or by IHT itself, and the 10% test on the residue alone may not produce the 36% rate trigger if the residue is shrunk by other bequests.

The hybrid route that many large landlord estates adopt: a small specific bequest to a named charity (giving the charity a recognisable, defined inheritance) plus a residue-share bequest sized to top up the total charitable amount to the 10% threshold on the full baseline. The PRs then have certainty over the 10% trigger regardless of how the residue plays out at probate.

The worked break-point: O'Connell £2,400,000 estate

The O'Connell persona, also used on our Wave 4 C5 deed-of-variation page (the cross-page consistency is intentional; the same estate is shown under both the as-written-will route here and the post-death deed-of-variation route there). Single estate at second death; husband predeceased the testator 12 years earlier; transferable allowances available.

Estate composition: family home £600,000 (held as sole owner after husband's first-death variation), BTL portfolio of four flats £1,500,000, investment portfolio £300,000. Total £2,400,000.

Available allowances: NRB £325,000 plus transferred NRB £325,000 = £650,000. RNRB taper position: estate is £400,000 above the £2,000,000 threshold, withdrawing £200,000 of combined RNRB (£175,000 plus £175,000 = £350,000 starting allowance, less £200,000 withdrawn, leaving £150,000 RNRB available). The residence value £600,000 is greater than the available RNRB so the £150,000 is consumed in full.

Counterfactual (no charitable bequest): chargeable estate £2,400,000 minus £650,000 NRB minus £150,000 RNRB = £1,600,000. IHT at 40% = £640,000. Family's net inheritance £2,400,000 minus £640,000 = £1,760,000.

With £160,000 charitable bequest (10% of the £1,600,000 baseline): the £160,000 goes to charity (s.23 IHT exemption, so it is not in the chargeable base). Remaining chargeable estate £1,600,000 minus £160,000 = £1,440,000 at 36% = £518,400 IHT. Family's net inheritance £2,400,000 minus £160,000 charity minus £518,400 IHT = £1,721,600.

Comparison: family receives £38,400 less under the charity-bequest route (£1,760,000 minus £1,721,600). Charity receives £160,000. IHT bill drops by £121,600. The family's £38,400 loss is the cost of redirecting £160,000 to a cause the testator wanted to support; equivalently, every £1 the family forgoes redirects £4 to charity (a 76% gearing on the family donation). For many families with charitable intent this gearing is enough to justify the bequest even where the testator was indifferent to a specific charity at will-drafting time.

The break-point algebra: when does the family break even?

Algebraically the family is indifferent between charity-bequest and no-charity-bequest at the break-point where the IHT rate saving on the residual chargeable estate equals the size of the charity bequest itself.

Let G be the charity bequest, B the baseline (chargeable estate before bequest). The rate saving on the residual (B minus G) at 4% is 0.04 × (B minus G). The family is indifferent where G equals 0.04 × (B minus G), which rearranges to G = B × 0.04 / 1.04 = B × 3.846%.

The break-point bequest is approximately 3.85% of the baseline. Below 3.85% the family is better off keeping the money (because the 10% threshold is not met and the 36% rate does not trigger; the charity bequest is just a charitable gift, not a rate-trigger). Above 10% (the trigger threshold) the family is worse off at the margin (each additional pound to charity costs the family £0.64 net, since the 4% rate saving on the diminishing residual cannot keep up with the bequest size). Between 3.85% and 10% there is no rate effect because the threshold has not triggered.

The practical implication: if the family is going to make a charitable bequest at all, the 10% threshold is the optimal sizing in most cases (below 10% there is no rate benefit; above 10% the rate benefit is diluted across a larger gift). Most landlord-estate wills with charitable intent therefore size the bequest precisely to hit the 10% threshold on the relevant baseline, computed at the will-drafting date with adjustments at probate via deed of variation if needed.

The deed-of-variation route after death

Where the testator's will did not include a charitable bequest (because the testator did not anticipate the rate saving, or because charitable feeling came up after death within the family), the beneficiaries can within 2 years of death execute a deed of variation under s.142 IHTA 1984 that redirects the relevant proportion of their inheritance to charity. The s.142 election in the deed makes the redirection read back to the deceased for IHT, and the Sch 1A 36% rate applies if the redirected amount meets the 10% threshold on the relevant component baseline.

The deed-contents checklist, the no-consideration rule, the 2-year window, and the s.62(6) TCGA 1992 CGT election are covered in detail on our Wave 4 C5 page at Deeds of Variation on Landlord Estates. The cross-page operational point: many landlord families execute the 36% rate trigger via deed of variation rather than via the original will, because the family-decision process is easier to run with full information at probate (when actual values are known) than with assumed values at will-drafting. The 2-year window from death is strict; once closed, the deed-of-variation route is no longer available and the original will's distribution stands.

The IHT430 claim mechanics

The reduced-rate claim is made by the PRs on form IHT430 alongside the IHT400 estate return, within 12 months of the end of the month of death. The IHT430 walks through:

• The components of the estate at death (general, survivorship, settled).
• The value of each component.
• The NRB attributable to each component under Sch 1A para 6.
• The baseline amount of each component.
• The charitable bequest value from each component.
• The 10% test calculation for each component.
• The merger election (if made) and the combined baseline calculation.
• The reduced-rate IHT computation by component.

HMRC processes the claim alongside the standard IHT400 review. The reduced rate is applied to the IHT account; PRs receive credit for the rate adjustment. PRs should retain the underlying calculations (baseline workings, charity registration evidence, will, any deeds of variation) on the estate file for at least 7 years after probate against any later HMRC enquiry.

For the interaction with the April 2026 £1m BPR/APR cap (which increases the chargeable estate base and hence the baseline amount), see our Wave 4 page at £1m BPR/APR Cap: Allocation Across Mixed Landlord Estates. For the post-death route to retro-engineer the 36% trigger via s.142 deed of variation, see Deeds of Variation on Landlord Estates. For the pre-death routes that complement charitable legacy (lifetime gifting under PET, FIC value-freeze, spouse exemption), see the planning-lens page at An IHT Decision Framework for UK Landlords.