What an inheritance tax bill looks like
The bill can be worked out from four published figures. For business owners the rules changed twice in eighteen months.
The bill can be worked out from four published figures. For business owners the rules changed twice in eighteen months.
Three of these four figures are frozen until April 2031, so they fall in real terms each year that house and business values rise.
Everyone gets it. Anything you leave your spouse or civil partner is exempt and does not use it up, so an unused band passes to them. A couple can therefore have £650,000 between them.
An extra allowance when the home passes to children or grandchildren. Also transferable. A couple leaving a house to their children can therefore reach £1,000,000 before anything is taxable.
Charged on everything over the available bands. It falls to 36% where at least 10% of the net estate goes to charity.
The residence band is cut by £1 for every £2 the estate is worth above £2m. A couple's £350,000 of residence bands is therefore gone entirely by £2.7m. A business counts towards this £2m even when relief takes it out of the bill.
All four are HMRC's, published on gov.uk, and confirmed as frozen at these levels until 5 April 2031 at Budget 2025. Every assumption we model with is published, and the tax figures are checked against source each year.
Business property relief changed twice between the 2024 Budget and April 2026.
From 6 April 2026 a single allowance covers the combined value of property qualifying for 100% business or agricultural relief. It was announced at £1m in the 2024 Budget and raised to £2.5m on 23 December 2025 before it ever took effect.
Unused allowance passes to a surviving spouse or civil partner, so a couple can shelter up to £5m of qualifying business assets. Add the nil-rate bands and gov.uk puts the figure at £5.65m between two people.
Qualifying value over £2.5m gets relief at half rate, so it is taxed at an effective 20%. Shares designated as “not listed” on a recognised exchange, which includes AIM, get 50% in all circumstances.
For the £2m taper test, HMRC values the estate before reliefs are applied. A business worth £1.4m is fully relieved and still counts in full towards the £2m.
Business property relief takes the business out of the tax bill and leaves it in the estate for the purposes of the taper. Losing a couple's £350,000 of residence bands adds £140,000 to the bill at 40%.
Ray and Dianne, both 61. He runs a trading company; she works in it. Their wills leave everything to each other and then to their two children. The bill lands on the second death, and we have modelled it in 2028 so the pension rules below apply.
Home £750,000. Company shares £1,400,000. Unused pensions £600,000. ISAs, savings and investments £320,000. Cars and everything else £80,000. £3,150,000 in total.
The shares qualify in full and sit inside the £2.5m allowance, so £1,400,000 comes off. Two nil-rate bands give £650,000. The residence bands would be £350,000, and the taper removes them.
The estate is £3,150,000 for the taper test, because relief is ignored for that purpose. That is £1,150,000 over £2m, so the reduction is £575,000 against £350,000 of available band.
£3,150,000 less £1,400,000 of relief is £1,750,000. Less £650,000 of nil-rate bands leaves £1,100,000 taxable. At 40% that is £440,000, payable within six months of the end of the month of death.
Run the same estate under the rules that applied before April 2027, with the £600,000 of pensions outside it, and the estate is £2,550,000. The taper reduction falls to £275,000, so £75,000 of residence band survives, and the bill is £170,000. The pension change costs this family £270,000: £240,000 of tax on the pension itself, and £30,000 more because the pension pushed the taper further. That is 45% of the pot.
The children then inherit the rest of the pension. Because Ray and Dianne are over 75 at the second death, the beneficiaries pay income tax at their own marginal rates on whatever they draw out. On the £360,000 left after inheritance tax, a child paying higher-rate tax keeps about £216,000 of the original £600,000. The Financial Plan calculates this. The free projection models what you spend and leaves it out.
From 6 April 2027 most unused pension funds and death benefits come inside it. Death-in-service benefits from a registered scheme are excluded, and so are dependants' scheme pensions from defined benefit or collective money purchase arrangements. HMRC's own estimate is that 10,500 estates will pay inheritance tax in 2027-28 that would previously have paid none, with a further 38,500 paying more.
Add the house at today's value, the business at what a buyer would pay for it, both pensions, the ISAs and the death benefit on any policy not written in trust.
The bill is due within six months of the end of the month of death, and probate is not normally granted until it is paid or arranged. A company holding is the slowest asset in the estate to turn into cash and often the largest. Personal representatives now carry the reporting and payment duty on the pension element too.
Gifts fall out of the estate after seven years. Taper relief cuts the rate on gifts made three to seven years before death — 32%, 24%, 16%, then 8% — but only bites on gifts above £325,000, so on smaller gifts it does nothing at all. The £3,000 annual exemption carries forward one year only.
We will tell you the size of the bill, when it falls, which assets would have to be sold to pay it, and what different choices do to the number. We will not tell you to make a gift, set up a trust, restructure your shareholding or take out a policy. Those are regulated recommendations or legal work, and Buzz Financial Planning is not authorised to give regulated advice. Where a decision needs one we say so and can introduce you to Equity & General (FCA 474163). The introduction is optional, and we tell you about E&G's commission to Buzz before it.
House at today's value, business at a defensible one, every pension, ISAs, other investments, and any life cover not written in trust. Total it on one page.
Use what a buyer would pay. What happens to your business when you stop covers how that value is reached.
Wills written before 2017 predate the residence band; wills written before 2026 predate the current business relief rules. A will that leaves everything into a discretionary trust can lose the residence band entirely. Will reviews are legal work, which Buzz Legal in the same group does.
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Not necessarily. The £2.5m allowance for 100% business property relief from 6 April 2026 is transferable between spouses, so a couple can shelter up to £5m of qualifying business value. The business must qualify. It must be trading, and a business mainly holding investments does not qualify, and excepted assets such as surplus cash or an investment property held in the company can be stripped out of the relief. Where the value sits above the allowance, relief drops to 50% and the excess is taxed at an effective 20%. Any tax due is payable within six months, although personal representatives can elect to pay the tax on some business property and unquoted shareholdings in ten annual instalments.
We cannot answer that for you. The answer depends on your marginal rate now, your marginal rate in retirement, whether you are likely to spend the money yourself, and how far your estate sits above the bands. Employer pension contributions are generally deductible for corporation tax and free of National Insurance. The 2027 change affects what happens to unused funds on death. The tax treatment of contributions is unchanged. We can model both versions in your own numbers. Telling you which to do would be a regulated recommendation, and Buzz is not authorised to make one.
Two separate taxes apply. First, inheritance tax: most unused funds and death benefits count in the estate, so they can be taxed at 40% above the available bands. Anything passing to a surviving spouse or civil partner stays exempt, as it always has. Death-in-service benefits from a registered scheme are outside the change, as are dependants' scheme pensions from defined benefit or collective money purchase arrangements. Second, income tax: the beneficiary pays their own marginal rate on what they draw if you died after 75, and generally nothing if you died before. Where both apply to the same pot, the worked example above shows a higher-rate beneficiary keeping about £216,000 of a £600,000 pension.
It applies to one specific case. Two nil-rate bands of £325,000 plus two residence bands of £175,000 comes to exactly £1,000,000, and that is the true position for a married couple leaving a home to their children with an estate under £2m. Above £2m the residence bands taper away at £1 for every £2, so they are gone by £2.7m and the real allowance falls back to £650,000. For the taper, the estate is measured before business property relief is applied, so a business counts in full towards the £2m. Losing both residence bands adds £140,000 to the bill at 40%.
The seven-year rule depends on surviving seven years after the gift. Gifts drop out of the estate after seven years, and taper relief reduces the rate on gifts made between three and seven years before death — 32%, 24%, 16% and 8% — although it only applies to gifts above £325,000, so on modest gifts it changes nothing. The bigger practical problem is the gift with reservation rule: carry on living in the house you gave away, or keep taking dividends from shares you gave away, and it stays in your estate regardless. Regular gifts out of surplus income are exempt immediately, if they are part of a pattern and leave your standard of living unchanged.
No. Financial planning is not regulated advice. We describe how the rules work. We model your own figures and show you the size of the bill, when it falls due and what different choices do to it. Recommending a gift, a trust, a product, a provider or a restructuring is regulated advice or legal work, neither of which Buzz Financial Planning is authorised to give. Where that is what a decision needs, we say so and can introduce you to Equity & General (FCA 474163), disclosing beforehand that they pay us a commission if you become their client. Wills and powers of attorney are Buzz Legal. You can check any firm on the Financial Services Register at register.fca.org.uk.
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