The bill at the end
What an inheritance tax bill actually looks like
Most people either assume they will pay nothing or assume they will be hammered. The number is knowable, and for business owners it moved twice in eighteen months.
Most people either assume they will pay nothing or assume they will be hammered. The number is knowable, and for business owners it moved twice in eighteen months.
Inheritance tax is arithmetic before it is anything else. Four figures do almost all the work, and three of them are frozen until April 2031, which means they shrink in real terms every year while houses and businesses do not.
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. That is why couples are usually looking at £650,000 between them rather than £325,000 each in isolation.
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 — which is where the familiar “a million is fine” figure comes from.
Charged on everything over the available bands. It falls to 36% where at least 10% of the net estate goes to charity, which is a real number rather than a gesture and worth knowing about before a will is written.
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. This is the number that catches business owners, for the reason in the next section.
All four are HMRC's, published on gov.uk, and confirmed as frozen at these levels until 5 April 2031 at Budget 2025. We do not use rules of thumb for this. Every assumption we model with is written down in public, and the tax ones are taken from source each year rather than remembered.
Business property relief is the largest single item in most owners' estates and it changed twice in short order. Both changes matter and they point in opposite directions.
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% rather than 40%. 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. Owners lose the residence band on a business they will never sell.
Business property relief takes the business out of the tax bill and leaves it in the estate for the purposes of the taper. That combination costs a lot of owners £140,000 of residence nil-rate band without anybody mentioning it, and it is invisible in every calculator that treats relief as a simple deduction.
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, which is a perfectly ordinary shape for a couple who built something and never sold it.
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 are worth £350,000 on paper — and nothing at all in practice.
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. It is wiped out with room to spare.
£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, on a pot that used to pass outside the estate altogether.
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 free projection will not do this sum, and it is honest to say so — it models what you spend, not what you leave.
Three misconceptions do most of the damage, and the first one used to be true.
It was. 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 somebody would actually pay for it, both pensions, the ISAs and the death benefit on any policy not written in trust. Owners routinely land £800,000 above their own guess, and the business is usually the item they have never had valued.
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. Giving away something you still need is the more common mistake.
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) — optional, no obligation, and if you become their client E&G pay Buzz a commission, which we tell you before the introduction rather than after.
Four steps, in order. The first two are free and the first one is the one nearly everybody skips.
House at today's value, business at a defensible one, every pension, ISAs, other investments, and any life cover not written in trust. One page. The number at the bottom is usually the surprise, and no useful conversation about inheritance tax can happen before it exists.
Not the figure you would like and not the one in the accounts. What happens to your business when you stop covers why owners are so consistently wrong about this in both directions, and why the answer changes the whole plan.
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. That is legal work — Buzz Legal does it, and it sits in the same group.
The Financial Plan, at £1,500, runs your money forward to age 100 with UK tax applied year by year and inheritance tax calculated on what is left, under your own figures rather than an example. A worked plan shows you the finished article first. Ongoing planning is £49 a month if you want it re-run as the rules move, and on this subject they keep moving.
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Not necessarily, and for a lot of owners the answer is now no. 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. Qualifying is the word doing the work: the business must be trading rather than mainly holding investments, 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%. The bill still has to be found in cash within six months, which is a separate problem from whether relief applies.
That is a real question and it is not one we can answer for you, because 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. What we can say is that a pension is still the most tax-efficient way most business owners take money out of a company while they are alive, and the 2027 change affects what happens to what is left over, not what happens on the way in. Modelling both versions gives you a number rather than a feeling. Telling you which to do would be a regulated recommendation, and Buzz is not authorised to make one.
Two separate taxes, and people conflate them. 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 combined effect is severe, and it is arithmetic rather than opinion.
It is right for one specific case and wrong for most others. 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. Business owners hit that threshold more often than they expect, because the estate is measured before business property relief is applied. Quoting £1m to a business owner is usually £140,000 of optimism.
The seven-year rule is real, but it assumes a piece of information nobody has. 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. Giving away money you later need is the most expensive version of this by a distance.
No. Financial planning is not regulated advice, and this page is information about 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 genuinely 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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