Autumn Budget 2025 – Inheritance Tax (IHT) and charitable gifts

It was announced in the Autumn Budget that the ‘government will legislate to prevent Inheritance Tax avoidance through certain loopholes, including…restricting charity exemptions to direct gifts to UK charities and clubs.’

The government also published a policy paper and draft legislation, explaining: ‘This measure will provide a correction to the separate IHT rule for gifts to charitable trusts so that they must meet the wider definition of a charity with ensuing jurisdiction and regulatory requirements.’

In this article we look at what the changes are and their potential impact for charities in England and Wales and their donors.

The changes for charities and donors

The changes provide that, whilst a transfer of value will continue to be exempt from IHT if made to a charity, it will no longer be exempt from IHT if the property is given to be held on trust for charitable purposes (ie the recipient trust would need itself to be a charity for the exemption to apply).

For this purpose, it is key to highlight that the specific definition of a ‘charity’ for UK tax purposes applies, as set out in Schedule 6 of the Finance Act 2010 (FA 2010). Broadly, under the FA 2010, a charity is body of persons or trust that:

• is established for charitable purposes only;
• is subject to the control of a relevant UK court;
• has complied with any requirement to register as a charity with the Charity Commission (or the Office of the Scottish Charity Regulator or the Charity Commission for Northern Ireland); and
• its managers are ‘fit and proper persons’ to be managers of the body or trust.

The fourth limb of this test at (d) above is clearly difficult for donors to ascertain. However, HMRC guidance indicates it would only proceed to reject a charity’s claim for tax relief due to a failing on this basis in exceptional cases. Donors can reasonably expect therefore that a charity which is either registered with the Charity Commission, or which is exempt or excepted from registration, is also a charity for UK tax purposes.

Timing and impact

For transfers on death, the changes are due to take effect when the deceased dies on or after 6 April 2026. For transfers of value at any other time, they take effect when made on or after 26 November 2025.

We expect that the changes will be most relevant to transfers on death, ie where a testator leaves a gift in their Will on trust for charitable purposes at the discretion of the trustees, rather than to specific charities in fixed percentages. This can be common where testators have a number of charities they wish to benefit, prescriptive wishes around the use of charitable funds (which may not be practical to set out within a Will), or wish to retain flexibility and control over the destination of their assets depending on the circumstances at the time of their death. In order to claim the IHT exemption, depending on the terms of the Will, the executors will need to:

• distribute the gift to a UK charity or charities within two years of death to ensure the charity exemption applies (either through an appointment from a Will trust or a variation of the estate to ensure it passes outright to charities, ensuring it is notified to the charity); or
• ensure the trust established under the Will meets the definition of a charity above. In England and Wales, where the gift is more than £5,000, this will require registering the trust with the Charity Commission.

The policy paper suggests that the changes will impact “fewer than 50” individuals who may need to reframe charitable gifts in their Wills. Given our experience with philanthropic clients, we consider the number of individuals these changes will affect is significantly higher. This has not been widely picked up and although it should (in time) simplify some gifts to charities, it could inadvertently trip executors and trustees up where existing Wills are not or cannot be amended (for example, because the testator has lost capacity), and cause IHT to become chargeable where the sole intention is to leave funds to charities – leaving charities with less overall.

It also leaves open the possibility of a testator leaving to a gift to a charity which, when they die, still exists but has been denied charity tax reliefs. In such a case it may be helpful for the Will to provide that a gift will only take effect if the named charity qualifies as a charity for UK tax purposes (if that is what the testator intends).

Thankfully, for interest in possession trusts which were already in existence before 26 November 2025, there is a saving provision. If on a subsequent transfer of value (typically on the death of the life tenant, or if the trust comes to an end during their lifetime) the trust property is held on trust only for charitable purposes (and would therefore fall foul of the new legislation), the charity exemption will still apply if trustees give the assets to charities within two years, beginning with the date of the transfer.  Again, trustees will need to be alive to this to avoid a significant IHT charge on assets which would have otherwise been charity exempt.

Practical steps

The change to the rules has highlighted some practical points we recommend:  

• testators who have existing trusts for general charitable purposes revisiting their Will and any accompanying Letter of Wishes to ensure their wishes continue to be met in the most appropriate manner and that their executors and trustees are alerted to the importance of ensuring any charitable gifts qualify for the IHT exemption (which may require a distribution to be made within two years of death);
• where a testator is considering establishing a charitable trust in their Will, they instead consider setting up a charity during their lifetime. An application can be made to HMRC to recognise it as a charity for UK tax purposes and they can name that charity as the recipient in their Will. This will provide greater certainty about how their gift will be used and facilitate the administration of their estate. Others may prefer to leave outright gifts or consider using donor advised funds for the receipt of charitable legacies if the administration of a charitable trust may not be warranted;
• advisers being proactive in considering how best to deal with charitable gifts early in the estate administration process, as it could impact the completion of the IHT return and the payment of IHT, depending on the nature of the gift; and
• more generally, charities reminding themselves of the definition of a charity for UK tax purposes. If a charity does not already have an HMRC charity tax reference number, it would be prudent to apply for one, and they will then be able to provide the reference number to executors or donors on request. HMRC also suggests charities ask their managers (including trustees) to sign a model declaration (Fit and proper persons helpsheet and declaration) confirming they are fit and proper persons.

Please get in touch with Richard Honey, Liz Gifford, or your usual CRS contact if you would like to discuss further.