Schedule 1A of the Inheritance Tax Act 1984 reduces the inheritance tax rate on a deceased person’s estate from 40% to 36% when at least 10% of the taxable value is left to charity. The schedule, inserted by the Finance Act 2012, sets out how the estate is split into components, how the 10% test is applied to each, and what elections personal representatives can make to improve the outcome.
The 10% Charitable Giving Condition
The core test is called the “charitable giving condition.” It is met when the “donated amount” for a component of the estate is at least 10% of the “baseline amount” for that component. In plain terms: if at least a tenth of what would otherwise be taxed at 40% goes to charity, the rest of that taxable portion drops to 36%.
The test runs component by component, not across the estate as a whole. One component can qualify for 36% while another pays 40%, depending on where the charitable gifts fall. That distinction matters because most estates hold different types of property in different ways, and the schedule treats each strand separately.
The Three Components
Schedule 1A divides the estate into three components, each assessed on its own:
- The survivorship component covers property the deceased held jointly that passes automatically on death by survivorship, or by a special destination under Scottish law. Joint bank accounts and homes held as joint tenants are the usual examples.
- The settled property component covers assets held in a trust in which the deceased had an interest in possession immediately before death. Life interest trusts are the typical case.
- The general component covers everything else: assets owned outright and passing under the will or intestacy rules. For most estates this is the largest component and the one most likely to contain a charitable legacy.
Property brought into the estate by the gifts-with-reservation rules in the Finance Act 1986 sits outside all three components and does not count toward the 36% calculation.
Working Out the Baseline and Donated Amounts
For each component, the baseline amount is the portion of that component’s value that would otherwise be chargeable at a rate above nil. The nil-rate band is allocated across the components first; whatever taxable value remains in each component is its baseline.
The donated amount is the total value of property in that component that qualifies for the charity exemption under Section 23(1) of the Act, covering gifts to UK-registered charities, community amateur sports clubs, and qualifying overseas charities. If the donated amount is at least 10% of the baseline, the component qualifies for 36%.
The comparison is against the baseline, not against the whole estate or the whole component. Because the nil-rate band shrinks the baseline first, the threshold for meeting the 10% test is often lower than people expect. Take a general component worth £600,000 in the 2026-to-2027 tax year: after £325,000 of nil-rate band, the baseline is £275,000, and a charitable gift of £27,500 is enough to bring the whole £275,000 down to the 36% rate.
Merging Components
Personal representatives can elect to merge two or all three components. This helps when one component clears the 10% threshold with room to spare while another falls short: combining them lets the surplus charitable giving in the first offset the shortfall in the second.
Merging is not always sensible. If one component already qualifies and another contains no charitable gift, combining them can dilute the ratio below 10% and push the merged component back up to 40%. Run the numbers both ways before deciding. The election must be made by all relevant personal representatives, and it is irrevocable once submitted to HMRC.
Opting Out of the Lower Rate
Schedule 1A also lets personal representatives elect for the lower rate not to apply to a specific component, leaving it taxed at 40%. This sounds odd, but it can produce a better result in narrow cases where the interaction between a charitable legacy and the 36% rate leaves the non-charitable beneficiaries worse off than they would be at 40% on a different taxable base.
Opting out is rare in practice. It mainly arises when a will expresses the charitable legacy as a percentage of the residuary estate, creating a circular calculation between the tax rate and the legacy size. Professional advice pays for itself whenever that kind of circularity appears.
Does the 36% Rate Actually Save Money
The lower rate helps both the charity and the other beneficiaries, but not equally, and not always.
Take a general component with a £500,000 baseline. At 40%, the tax bill is £200,000. If the deceased leaves £50,000 to charity (exactly 10% of the baseline), the remaining £450,000 is taxed at 36%, producing tax of £162,000. The non-charitable beneficiaries end up with £288,000 rather than the £300,000 they would have received with no charitable gift at all, so they are £12,000 worse off. The charity is £50,000 better off.
The picture changes when a charitable legacy was already in the will. If the £50,000 gift was going to happen anyway, the 36% rate saves £18,000 in tax compared with paying 40% on the same £450,000. The charity still receives its £50,000 and the beneficiaries keep £18,000 that would otherwise have gone to HMRC. Schedule 1A rewards estates that were already charitably inclined rather than nudging estates toward giving from scratch.
How Executors Claim the Lower Rate
The claim is made on Form IHT400, the inheritance tax return submitted during probate. Executors identify each component, calculate the baseline and donated amounts, and confirm the 10% threshold is met. Any election to merge components or to opt out is submitted with the return. HMRC reviews the figures and applies 36% when issuing the final assessment.
Accurate valuations matter more than usual here. Overvaluing the estate inflates the baseline and can push a borderline charitable gift below 10%; undervaluing risks penalties. For property, private company shares, and other hard-to-value assets, a professional valuation protects the executor if HMRC pushes back.
How Schedule 1A Fits With the Nil-Rate Bands
The 36% rate operates alongside the other main reliefs. The nil-rate band of £325,000 still applies, and any available residence nil-rate band (up to £175,000 for 2026-to-2027) reduces the taxable estate before the 36% calculation runs. Assets passing to a surviving spouse or civil partner are exempt entirely under the spousal exemption, and unused nil-rate band or residence nil-rate band transfers to the survivor’s estate on their later death.
The taper that cuts the residence nil-rate band for estates over £2 million also interacts with Schedule 1A. A large charitable gift lowers the net estate value used for tapering, which can preserve more of the residence nil-rate band and satisfy the 10% condition at the same time. For estates close to the £2 million line, this dual effect is worth planning around carefully.
Not the Same as the Downsizing Addition
Schedule 1A is sometimes confused with the downsizing addition to the residence nil-rate band. They are unrelated. The downsizing addition sits in Sections 8FA to 8FE of the Act and preserves part of the residence nil-rate band when someone sells or gives away their home before death; it is claimed on Form IHT435 within two years of the end of the month of death. Schedule 1A is only about the relationship between charitable legacies and the rate of inheritance tax on the rest of the estate, and it is claimed through the standard IHT400 return. An estate that involves both a charitable legacy and a downsized home has to address each provision separately.