Octopus Inheritance Tax Service
The Octopus Inheritance Tax Service gives experienced investors an opportunity to protect their assets from inheritance tax. After two years, the investment should benefit from IHT relief, provided it is still held on death. The service aims to deliver a consistent, but modest, level of return over the investment period, not guaranteed.
Investors in the service become shareholders of Fern Trading Limited, an unquoted trading company expected to qualify for Business Property Relief (BPR) with interests spread across over 250 subsidiary businesses. These are involved in a variety of activities, from property lending and renewable energy to healthcare and fibre broadband.
The service has grown rapidly since it launched in 2007 and is now the largest of its kind, having attracted more than 18,500 investors and over £2 billion in assets. The service has a good track record of maintaining its BPR qualifying status: there have been more than 3,980 claims on death and all have qualified for IHT relief to date.
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- Aims for predictable but modest returns over the investment period – not guaranteed
- Interests in renewable energy, healthcare, property, and fibre broadband infrastructure
- Well resourced investment teams
- Target return of 3% per annum – not guaranteed
- Regular liquidity: investors should usually be able to withdraw funds on request
- Potential for investments to become immediately exempt from IHT if reinvesting the proceeds from the sale of another BPR-qualifying asset
- Good BPR claims track record: no known HMRC challenge on over 3,000 deaths of shareholders to date: remember tax rules depend on circumstances and rules can change
- Minimum investment £25,000, you can apply online
Octopus Investments launched in 2000 and has since built market-leading positions in tax-efficient investment, smaller company financing, renewable energy and healthcare. The business has a total of £10.1 billion under management across all of its products and services.
Octopus has been managing Business Property Relief (BPR)-qualifying investments since 2005. It launched the Inheritance Tax Service in 2007. Since then, the service has attracted over 18,500 investors, and 3,980 estates have claimed BPR. Fern Trading Limited, currently the sole investee company within the service, has assets of over £2.4 billion.
The IHT service is headed up by Ed Fellows who, alongside a team of 11, is responsible for designing, monitoring, evaluating and improving the strategy, with the team reporting into the majority independent board of Fern Trading Limited.
Meet the manager: watch our interview with Rob Skinner of Octopus ITS
The Octopus IHT service, although it has the discretion to invest in other unquoted companies, currently invests solely in Fern Trading Limited (“Fern”), an unquoted company which is entirely owned by clients of the Octopus IHT Service. Fern, in turn, owns and operates over 250 subsidiary businesses across a number of sectors.
The key requisite is for the business to be BPR-qualifying. In addition, it must generate a predictable and sustainable rate of return required to meet the investment objective in the management's view.
Sector diversification is an important part of Fern’s business strategy. Fern’s business is split across three core sectors selected to work together to target predictable growth over the long term.
1. Short-medium term loans
Fern lends money on a short-term basis to experienced property developers and landlords. Loans are secured against commercial or residential property. The business also lends to corporate borrowers to fund construction projects, such as building hospitals, care homes and retirement villages.
The loans are sourced by the 65-strong Octopus property team, which includes 31 investment professionals.
To date, the business has lent over £4.7 billion across 3,700+ loans. Typically, Fern has first ranking security on more than 90% of its loans. The average loan to value is less than 65%, and the average term is 27 months. The historic track record is good, with just 0.02% of capital losses realised on £3.7 billion of loans repaid: note past performance is not a guide to the future.
2. Renewable energy
Fern’s renewable energy business owns and operates a number of renewable energy sites, including five biomass sites, 21 wind farms, 10 reserve power stations, 22 landfill gas sites, and 150 solar sites. Indeed, Fern is the UK’s largest producer of solar energy from commercial-scale sites; if laid end to end, its solar panels would stretch from London to Mexico City.
As with the lending business, renewable assets are managed by a large team of 70, including 31 investment professionals and 10 technical sector specialists. The team has invested £2.9 billion since 2010. The renewable assets owned by Fern produce enough energy per year to power every home in Northern Ireland.
The investment team focuses on buying large institutional-grade renewable sites, benefitting from long-term inflation-linked government incentives, with an expected life span of 20-25 years.
The healthcare business finances, owns and operates healthcare facilities: private hospitals, care homes, and retirement communities. The business is expected to be a beneficiary of growth in healthcare spending and an ageing population. The team has focused on healthcare assets for the past 15 years and comprises 20 sector specialists.
4. Fibre broadband – new sector
The rollout of full fibre broadband is a key policy objective of the UK government, and a crucial part of the UK’s economic infrastructure. Whilst the market leader BT focuses on large cities, there are opportunities for smaller providers to develop full fibre broadband networks in mid-sized towns where demand for better broadband could deliver attractive returns to investors.
In 2019 Fern entered the market with the acquisition of two fibre broadband businesses: Jurassic Fibre and Swish Fibre. Fibre currently represents 4% of Fern Trading’s total assets; if the venture proves successful, it is expected the sector will become an increasingly important part of the business, adding further diversification.
In our view, this highlights a key advantage for the service over smaller services. Fern is large enough to be able to explore new opportunities without needing to allocate a large proportion of its capital to the project.
The service targets a gross return of 4.2% per annum, equivalent to 3% per annum after fees and charges over the holding period – not guaranteed.
To help achieve this, the annual management fee is deferred until the investment is sold, allowing capital to accumulate and providing a buffer in the event of weaker performance. In addition, the management fee is payable only if investors achieve the 3% annual growth target. This is referred to as the “Growth Shield”.
As the table below shows a 3% return per annum (after all fees) compares favourably to higher returns once the IHT relief is taken into account. Remember, tax rules can change and benefits depend on circumstances. Eligibility for BPR IHT relief is only assessed at the point of death.
Impact of IHT on investment returns
The table below shows illustrative returns for a £100,000 investment over 5, 10 and 15 years, with and without IHT relief.
|With IHT relief||Without IHT relief (subject to 40% IHT)|
|Illustrative net return||3%||3%||5%||7%|
The illustration with IHT relief shown above also includes the impact of the initial fee, dealing fee, and the Wealth Club discount applied to this offer, whereas the comparisons with other returns subject to IHT assume no initial charges. Note, this is not an illustration for the Octopus IHT service: please contact us for your personal illustration.
Current assets overview
Currently Fern’s assets are split between its lending activities (33%) and its operating businesses: renewable energy (59%), healthcare (4%) and fibre optic (4%).
It’s worth noting renewable energy is a key area of focus for Fern. In addition to representing 59% of the assets, the sector also receives loans.
Source: Octopus Investments as at 5 April 2021.
Examples of assets by sector
Lending – previous example
An example of a short-term property loan was to a high-net-worth individual looking to act quickly to buy the remaining eight units in a development in London, SE1. Traditional lenders could not act as quickly to provide the financing required to complete this transaction. Fern provided the property investor with a loan of £3.7 million, on a loan to value of 65%. The borrower repaid the loan after nine months, following the sale of the first five flats.
Renewable energy – current example
Park Wall is a 5-MW solar site located in Bridgwater, Somerset. The vast site – covering 30 acres with 20,400 solar panels – can be seen when travelling on the southbound carriageway of the M5. It is expected to generate enough electricity to power 1,500 homes. 63% of revenues generated are covered by Renewable Obligation Certificates (ROCs), a government-backed scheme to incentivise large scale renewable energy generation.
Healthcare – current example
Rangeford Villages has developed and operates two retirement villages in Wiltshire and North Yorkshire, with a third due to open in Gloucestershire. It aims to create an environment where residents can maintain an active and independent lifestyle, thanks to a wide range of leisure activities, services, support and care. The business generates revenue by selling properties within the villages and by charging monthly fees to residents.
Fibre optic – current example
In 2019 Fern acquired two operators: Jurassic Fibre and Swish Fibre. Both aim to roll out full fibre broadband to underserved areas of the UK. Fern intends to provide up to £250 million of capital to each business to support their plans. Jurassic Fibre, is rolling out its fibre network across the South West, starting with East Devon. Swish Fibre is focused on the home counties and has identified 11 locations along the M4 corridor.
One Healthcare Partners Limited
As is to be expected, not all projects have worked out. Fern backed a healthcare management team in 2014 to build a private hospitals group – One Healthcare.
The first hospital opened in Ashford in March 2016 and the second in Hatfield in December 2017. Unfortunately, the hospitals didn’t fill up as quickly as expected. The management team had anticipated larger inflows from private referrals and NHS business than the number of patients the hospitals actually received. Following a default on the loan, One Healthcare Partners became part of Fern. In total £42.4m was written off and Fern gained an 85% shareholding in the two hospitals.
Fern has since replaced the management and focused the team on making the two existing sites profitable. The two sites have improved but aren’t profitable yet.
Over the last 10 years to July 2021, Fern Trading has achieved a 43.5% growth in its share price, equivalent to a 3.7% return per annum. This is lower than the stated target of 4.2% gross of fees. However, due to the “growth shield” initiative, shareholders will have received the 3% per annum growth target after fees. Past performance is not a guide to the future.
Source: Octopus Investments. The performance data shows Fern Trading’s share price only. It does not take account of initial fees, dealing fees, or annual management charges associated with the service. Performance is calculated based on the sale price for Fern’s shares on a monthly basis between Apr 2010 – July 2021. Past performance is not a guide to the future.
Access to your investment
A key focus of the investment strategy is to own assets which might have a pool of willing buyers, should the company wish to sell those assets in the future, although this is not guaranteed. This should help the company fulfil requests to buy back shares from shareholders or their beneficiaries.
Octopus can arrange to sell some, or all, of your shares if you need to. Shares are usually sold within 10 days, and since the service launched in 2007, share sales have never taken more than a month. In certain exceptional circumstances, such as a change of tax rules, share sales can take significantly longer and the timing of share sales and return of your remaining capital cannot be guaranteed. You should not invest in the Octopus Inheritance Tax Service unless you are able to accept that – in exceptional circumstances – it could take a year or more to access your investment following a withdrawal request.
Octopus can also facilitate regular withdrawals on a monthly, quarterly, bi-annual, or yearly basis if required. To make a one-off share sale, you need to withdraw at least £5,000 and have £5,000 remaining in your investment.
Risks – important
This, like all investments available through Wealth Club, is only for experienced investors happy to make their own investment decisions without advice.
The IHT service contains assets which are high risk and should only form part of a balanced portfolio, you should not invest money you cannot afford to lose. The service invests in illiquid assets which may be hard to sell or value. Before you invest, please carefully read the Risks and Commitments and the offer documents to ensure you fully understand the risks.
Tax rules can change and benefits depend on circumstances. Eligibility for BPR is assessed at the date of death and will depend on the companies in the portfolio remaining qualifying. Broadly speaking, you will need to have held a BPR qualifying stock for at least two years and still hold it on death to qualify.
More than 3,000 investors have passed away since the service launched, in every one of these cases, their investments have qualified for business property relief where the investor died after two years.
A previous Chancellor requested a review of IHT to simplify the tax system. A report was published in July 2019, but this has not yet led to any rule changes. Please remember, tax rules can and do change and benefits depend on circumstances.
A summary of the main charges and savings is shown below. The investment may have additional charges and expenses: please see the provider documents for more details. If you would like a full breakdown or a personal illustration, please let us know. Please note, as Fern has few employees in managerial positions, management functions are typically performed by Octopus Investments, hence the annual investee company management charge.
|Full initial charge||3.5%|
|Wealth Club initial saving||—|
|Net initial charge through Wealth Club||3.5%|
|Annual management charge||1.5%|
|Exit fee||—||Investee company charges|
See example of the total charges over 5 years
The Growth Shield
Octopus charges investors an annual management fee of 1.5% in total (plus VAT). 1% of this fee is deferred until the investment is sold. This fee is deferred until the investment is sold. The fee, or a proportion of it, is only payable if investors achieve the 3% per annum growth target. This is referred to as the “Growth Shield”. By deferring the annual fee until the investment is sold, capital is accumulated, this accumulation acts as a buffer to help shield investors and the 3% p.a. return target from weak performance.
This is the leading inheritance tax investment service of its kind in the UK, having attracted more than 18,500 investors and more than £2.4 billion in assets to date. Investors will gain exposure to Fern Trading Limited, a large unquoted company with interests spread across more than 250 subsidiary businesses operating in a number of sectors which are important to the future of the UK economy, including healthcare, renewable energy, and fibre broadband.
Both the service and Fern are reassuringly well resourced in our view, with three specialist investment teams working to deploy the company’s resources. The service has a long-term track record of achieving its investment objective, to return 3% per annum to investors after fees, although past performance is no guide to the future.
For experienced investors concerned about the potential impact of inheritance tax on their estate, this could be a compelling consideration. It may also be of interest for those looking for a service that can potentially offer BPR replacement relief: investors should form their own view.
Read important documents and apply
Wealth Club aims to make it easier for experienced investors to find information on – and apply for – tax-efficient investments. You should base your investment decision on the provider's documents and ensure you have read and fully understand them before investing. This review is a marketing communication. It is not advice or a personal or research recommendation to buy the investment mentioned. It does not satisfy legal requirements promoting investment research independence and is thus not subject to prohibitions on dealing ahead of its dissemination.
- Property & renewables
- Portfolio size
- £2.4 billion
- Initial charge
- Saving via Wealth Club
- Net initial charge