Most people will have heard of Inheritance Tax, but for many it is still gobbledygook! Phrases like Nil-rate bands, business relief, lifetime allowances etc… can sound complicated and isn’t exactly thrilling.
So, I am going to try and explain some key points as simply as possible (hopefully so that even a teenager could understand it – although I really don’t know how many teenagers read blogs these days!).
This is all quite relevant now, because in December 2025, the UK government made an amendment to the incoming Inheritance Tax rules. This change, a pretty major one, will be of interest to business owners and farmers, especially when they are planning on passing wealth to their families.
Firstly: What Even Is Inheritance Tax?
Imagine you’ve spent your entire life building up your money, home, business, investments, and all the other things that make up your “estate.”
When you die, HMRC (the taxman) looks at the value of what you owned and says:
“If it’s over a certain amount, we want a slice.”
That slice is Inheritance Tax (IHT). The amount you pay is usually 40% on anything above your allowances (e.g. if the value of the estate was £1M after all allowances then the IHT would be £400k). There are times when the rate will be lower than 40%, usually when a trading business is included in the estate (more on that later).
Ok, so what’s an “Estate” then?
Your estate is pretty much everything that you own:
- House
- Savings
- Investments
- Businesses (trading and non-trading)
- Cars
- The fancy watch you bought in duty free
- Pensions – most unused pension funds & death benefits (from 6th April 2027)
Add it all up — that’s what HMRC looks at.
How much can I leave in my estate without having an Inheritance Tax Bill?
The Nil Rate Band (NRB)
This is the standard “tax‑free allowance” for inheritance tax.
Right now, it’s: £325,000 per person. Think of it like the first £325k of your estate being invisible to HMRC. It is also transferable between spouses. This means that if you’re married and one spouse doesn’t use all of their £325k allowance when they die, the leftover part can be passed to the surviving spouse.
So, a married couple can have: Up to £650,000 tax‑free — without having to do anything complicated.
The Residential Nil Rate Band (RNRB)
If you leave your home to a direct descendant — kids, step‑kids, adopted kids, grandkids — you get an extra allowance.
This is currently £175,000 per person (and is also transferable between spouses).
So, if everything lines up, a couple could get:
- £325,000 each (Nil Rate Band)
- £175,000 each (Residential Nil Rate Band)
Which means up to £1 million tax‑free between a married couple.
The catch with the Residential Nil Rate band is that the value of the house has to be the same or more than the RNRB allowance being claimed. So, if the house was valued at £150,000 then only £150,000 of the allowance could be claimed (not the full £175k).
So, to get the full £1Million tax-free IHT allowance, the value of the house being left to a direct descendant needs to be more than £350,000.
Note – If your estate is over £2 million, then the RNRB starts to shrink— you lose £1 of it for every £2 you’re over. So if your combined estate is valued at £2.7M (for a married couple) then you will have completely lost your Residential Nil Rate Band.
Right – so what was the big change in December 2025 then?
Well, you may have heard and seen the uproar, especially from Farmers about Inheritance Tax in recent times (if you haven’t then where have you been – even Jeremy Clarkson was jumping up and down about it!).
If you own a qualifying business (a trading business or farm), the government lets you pass some or all of it to your family without paying Inheritance Tax. This is called Business Relief. This means that these qualifying businesses, farms etc could pass down through the generations without any Inheritance Tax.
Just a gentle reminder that BR only applies if the business is actively trading and has been owned / held for at least 2 years and is not mainly investment‑based.
In 2024 a huge change was announced – that this relief was going to be capped at £1 Million per person from April 2026. This meant that the estates for a lot of people would have to pay Inheritance Tax (due to the value of their businesses and farms).
On 23rd December 2025, the government came out with a change which made this new rule a little bit less penal. The mooted £1Million allowance was changed to £2.5Million per person. That means that a married couple can pass on a trading business or farm, with a value of up to £5Million without any Inheritance Tax (if the wills and estate planning is done correctly).
So, Business Relief was massively cut and then increased again! And for many business owners & farmers, that takes the tax bill from eye‑watering…to potentially non‑existent.
How Long Does an Estate Have to Pay IHT?
For most people
The estate has:
6 months from the end of the month of death to pay any Inheritance Tax.
Miss that deadline and interest starts building immediately.
But for qualifying Business Relief assets
The Inheritance Tax due on qualifying business assets can be paid in 10 equal annual instalments.
This rule exists so families don’t have to sell the business just to cover the tax bill — especially during a bad market.
And here’s the key clarification:
Remember I said that there are times when the Inheritance Tax rate is less than 40%? Well, the portion of a qualifying business above the £2.5M allowance is taxed at an effective rate of 20% – not 40%!
Business assets over the £2.5Million allowance are taxed at an effective rate of 20%.
This is because anything above the allowance only gets 50% relief, meaning:
- 50% of the value is taxable
- taxed at 40% → equals 20% overall
And that 20% can still be paid over 10 years.
So, a husband and wife can leave a qualifying (trading) business or farm, valued at up to £5Million without their family having to pay inheritance tax (provided the planning and wills are structured correctly).
For people who have estates, with qualifying businesses (& farms) greater than the combined £5Million transferrable allowances it means that now is the time to plan! There are steps that you can take to mitigate the impact of Inheritance Tax, but the key to this is sitting down, reviewing the impact, assess the various options available and then take action!
If this sounds like something that you think you should be considering and want to start the process or even just chat then please contact us here at our offices!
The information in this blog is provided for general guidance only and does not constitute personal financial advice. It highlights broad themes relating to inheritance tax, estate planning and business relief, and should not be relied upon to make decisions about your own financial situation.
Inheritance tax rules are complex, subject to change, and their impact will depend on your individual circumstances. Before taking any action, you should seek regulated financial advice that is tailored to your personal needs, objectives and financial position. Tax rules may change in the future and this article is based on our understanding as of 30th January 2026.
Modulus Financial Planning Ltd is authorised and regulated by the Financial Conduct Authority.