Octopus Inheritance Tax Service

The Octopus Inheritance Tax Service aims to give experienced investors an opportunity to protect their assets from inheritance tax, together with 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). After two years, the investment should benefit from IHT relief if still held on death. Tax rules can change and benefits depend on circumstances.

The service launched in 2007 and is now the largest of its kind, managing £3 billion in assets (April 2023). Fern now has interests spread across more than 300 subsidiary businesses and four core segments: property lending, renewable energy, fibre broadband, and housebuilding & healthcare.

The service has a good track record of maintaining its BPR qualifying status: with over 4,800 estates successfully claiming the relief to date. 

• Target return of 3% per annum – not guaranteed
• Regular liquidity: investors should usually be able to withdraw funds on request
• Minimum investment £25,000, you can apply online

The manager

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 £12.9 billion under management (March 2023) 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, over 4,800 estates have claimed BPR. Fern Trading Limited, currently the sole investee company within the service, has assets of £3 billion (April 2023).

The IHT service is headed up by Ed Fellows, who oversees a 140-strong team, including 13 Portfolio Managers who decide on strategy, cashflow forecasting and management, run the investment committee and manage the relationship with banks. The team also includes investment professionals who specialise in renewable energy, property, and healthcare.

Investment strategy

The Octopus IHT service 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 more than 300 subsidiary businesses across several 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 four core sectors selected to work together to target predictable growth over the long term.

1. Property lending 

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 77-strong Octopus property team, which has to date lent over £5.6 billion across 4,000+ loans. Typically, Fern has first ranking security on its loans. The current average loan to value is 61.3%, across 173 loans, with an average loan length at issue of 16 months. The historic track record of the team is good, with capital losses of just 0.03% and £4.6 billion of loans repaid: note past performance is not a guide to the future (November 2022). 

2. Renewable energy

Fern’s renewable energy business owns and operates more than 200 renewable energy sites, including biomass sites, wind farms, reserve power stations, landfill gas sites, solar sites and an energy from waste plant (April 2023). Fern is the UK’s largest producer of solar energy from commercial-scale sites, and produces enough renewable energy to power every home in Northern Ireland.

As with the lending business, renewable assets are managed by a large team of 80 sector specialists. 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.

3. Fibre broadband

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. However, as recently as September 2021, more than 1.3 million, mainly rural, premises still did not have access to superfast broadband. This creates opportunities for smaller providers to develop full fibre broadband networks in mid-sized towns that might be overlooked by larger providers and where demand for better broadband could deliver attractive returns to investors.

In 2019 Fern entered the market with two acquisitions, Jurassic Fibre and Swish Fibre, and now owns and operates six companies in the sector. 

4. Housebuilding & Healthcare

Octopus finances, owns and operates healthcare facilities: private hospitals, care homes, and retirement communities. The business expects to be a beneficiary of growth in healthcare spending and an ageing population. The team of 20 sector specialists has focused on healthcare assets including care homes, retirement villages, and other healthcare facilities for over 15 years and manages over £1.8 billion .

In early 2022, Fern entered the housebuilding market with the acquisition of Elivia Homes, which specialises in small scale, premium developments across the South East of England (3% of Fern’s trading assets – March 2023). In our view, this Fern is large enough to be able to explore new opportunities without needing to allocate a large proportion of its capital.

Target return

The service targets a gross return of 4.2% per annum, equivalent to 3% per annum after the annual management fee over the holding period – not guaranteed. Please note this excludes Wealth Club’s 0.50% ongoing charge.

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. Octopus refer to this as the “Growth Shield” (see charges section below).

As the table below shows, a 3% return per annum (after all Octopus 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.

Current assets overview

Currently Fern’s assets are split between its property lending activities (17%) and its operating businesses: energy (54%), fibre broadband (22%) and housebuilding (includes retirement village assets – previously shown as healthcare) (7%).

Sector breakdown (%)

Examples of assets by sector

Lending – current example

In February 2022, Fern lent just over £9 million to fund the purchase and refurbishment of a Grade II listed former shoe factory in Northampton which was being converted into 89 flats.

The property is a 5-minute walk from the city centre and within easy reach of train services to London. The borrower is an experienced property developer who intends to sell the units on the open market.

Renewable energy – current example

Beinneun Wind Farm is a 32-turbine, 108.8 MW installation near Fort Augustus in the Scottish Highlands. Each year, it produces approximately 278,000 MWh of power, estimated to be enough to power 27,000 households and offset 130,000 tonnes of carbon dioxide emissions. 

The site began operations in February 2017 and has since supported local social and environmental initiatives, including an ecotourism development and a habitat management plan for the endangered common scoter bird, which lives in the area. The site is also supported by a government-backed Renewable Obligation Certificate (ROC) subsidy. 

Housebuilding (including healthcare) – current example

Rangeford Villages has developed and operates three retirement villages in Wiltshire, Gloucestershire and North Yorkshire, with three more under development in Cambridgeshire and Surrey. 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

Fern entered the fibre broadband market with two acquisitions in 2019, and now operates six companies: Jurassic, Swish, Giganet, Varboss, Allpoints, and Vitrifi. 

Jurassic is based in Exeter and plans to roll out full fibre to more than 360,000 residential and business premises across Devon, Dorset and Somerset. The company employs around 320 local people and its network is now active in fourteen towns across the region. Jurassic is the only provider in many of these areas, creating the potential for years of steady demand. 

Fern is now building networks in London and the South, as well as the South West, and targeting a million properties across all its businesses by 2025.

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. However, patient inflows from private referrals and NHS business proved lower than the management team had anticipated. 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. Both hospitals provided overflow support to the NHS during the pandemic, but are now back operating a full private service. 

Performance 

Over 10 years to May 2023, Fern Trading has achieved 51.2% growth in its share price, equivalent to a 4.2% return per annum. Past performance is not a guide to the future.

Fern Trading 10 year share price performance

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 and 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.

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. 

In recent months, there have been widely reported rumours that the government might change or abolish IHT. It is currently unknown if and when any decision might be announced.  

Over 4,800 investors have died since the service launched, with their estates benefiting from business property relief where the investor died after two years.

Charges 

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. 

Our view

This is the leading inheritance tax investment service of its kind in the UK, having attracted thousands of investors and £3 billion in assets to date. Investors will gain exposure to Fern Trading Limited, a large unquoted company with interests spread across nearly 300 subsidiary businesses operating in several sectors that are important to the future of the UK economy, including housing, 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 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.

Wealth Club aims to make it easier for experienced investors to find information on – and apply for – investments. You should base your investment decision on the offer documents and ensure you have read and fully understand them before investing. The information on this webpage is a marketing communication. It is not advice or a personal or research recommendation to buy any of the investments mentioned, nor does it include any opinion as to the present or future value or price of these investments. It does not satisfy legal requirements promoting investment research independence and is thus not subject to prohibitions on dealing ahead of its dissemination.