What would you do? Do you think this is fair.

That’s not unfair melp1, if you leave half to one son, and half split equally between the other son’s two children nobody is disadvantaged? We’ve done that in our family too, there’s no animosity about it.

Your younger son is asking you to leave half your estate not to him but to his children because receiving the money would cause tax problems for him - I can’t see what these might be until he dies and his estate attracts IHT, unless interest on the inheritance might put him into the additional tax band, though if he’s so successful I would expect him to be paying tax at the additional, rather than higher, rate already. I expect he has ‘done his sums’. If that’s what he wants then honour his request, maybe leave him some personal item of his choice and leave the remainder to your other son. You can place a letter with your will to explain why you have divided your estate in the way you have. I would always suggest getting a solicitor to prepare a will as you need to consider the possibility of either son predeceasing you or having more children.

It’s your money and who you leave it to is entirely up to you, but it’s obvious to me that you really favour the daughter who has given you more grandchildren over those that haven’t done so for whatever reason. There’s no other way of seeing it. Unless you are concerned that spouses of your daughters will take the inheritance or prevent it being passed down to your grandchildren.
You could make it more fair by dividing the inheritance into sixths, one third each to each family - one sixth directly to each daughter and one sixth to be divided equally between each of her children.
It’s absolutely your prerogative to divide things unequally, your daughters should not sway your decision. You won’t be around to deal with the consequences of your decision so why are you concerned?
It will cause bad feelings from the daughters who have disappointed you by not having more children and possibly guilt from the daughter who has been able to have more children , but that’s not your problem.

My MIL left 10% to any granchildren and the rest was split between her two children I intend to do the same

I agree with your middle daughter - that this arrangement is unfair. Traditionally, funds are split equally between your own children, so what's wrong with that?

Our will splits everything 4 ways. Our 4 adult children get equal shares and they can pass that on as they see fit.
2 adult children have 2 children each but the 2 youngest do not have any children...yet ?? Who knows?