Charitable donations can potentially reduce Inheritance tax in 2 ways. Firstly, charitable donations are deducted when calculating a person's chargeable estate for Inheritance Tax purposes. Secondly, if the level of donations exceeds 10% of a person's net estate then the applicable rate of tax is reduced from 40% to 36%. This may not sound like much of a reduction but it can result in a scenario where both the charities and ultimate beneficiaries of the estate are better off (at the expense of HM Revenue & Customs!).