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 if 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 nearly 300 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, managing over £2.6 billion in assets (January 2022). The service has a good track record of maintaining its BPR qualifying status: with over 4,000 estates successfully claiming the relief to date. 

Important:The information on this website is for experienced investors. It is not advice nor a research or personal recommendation to invest. If you’re unsure, please seek advice. Investments are for the long term. They are high risk and illiquid and can fall as well as rise in value, so you could get back less than you invest.

Read important documents and then apply

Highlights

  • 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 approximately 4,000 deaths of shareholders to date: remember tax rules depend on circumstances and rules can change
  • 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 £12.4 billion under management (December 2021) 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 4,000 estates have claimed BPR. Fern Trading Limited, currently the sole investee company within the service, has assets of over £2.6 billion.

The IHT service is headed up by Ed Fellows who, as part of an 11 strong team, is responsible for designing, monitoring, evaluating and improving the strategy. The team reports into the majority independent board of Fern Trading Limited.

Meet the manager: watch our interview with Rob Skinner of Octopus ITS

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 nearly 300 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 77-strong Octopus property team, which has to date as lent over £5.7 billion across 3,900+ loans. Typically, Fern has first ranking security on its loans. The current average loan to value is 62%, and the average term is 27 months. The historic track record of the team is good, with just 0.03% of capital losses realised on £4.3 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 six biomass sites, 20 wind farms, 19 reserve power stations, 19 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 80 sector specialists. 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.

3. Healthcare 

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 of 20 has focused on healthcare assets for the past 15 years and manages over £1.3 billion. 

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 two acquisitions, Jurassic Fibre and Swish Fibre, and now owns and operates five companies in the sector. Fibre currently represents 10% of Fern Trading’s total assets (December 2021); 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. 

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.

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 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%
5 years £110,722 £69,556 £76,577 £84,153
10 years £128,357 £80,635 £97,734 £118,029
15 years £148,801 £93,478 £124,736 £165,542

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 (14%) and its operating businesses: energy (72%), healthcare (4%) and fibre optic (10%).

Source: Octopus Investments as at 31 December 2021.

Examples of assets by sector

Lending – Octopus Inheritance Tax ServiceLending – previous example

In December 2020 Fern lent £2.26 million to a developer looking to buy a site in Bedford. The developer was looking to convert what was previously office and warehouse space into 20 flats – meeting strong local demand for modern accommodation. 

This was a typical loan for Fern. It builds on an existing relationship with the developer – who Fern helped finance the development of 38 flats at another site in Bedford in 2017.

Solar – Octopus Inheritance Tax ServiceRenewable energy – current example

Abbots Ripton Solar Farm is a large-scale 25 MW solar site based in the East of England. The site was connected to the grid in 2014 and is comprised of 93,734 solar panels, which, laid end-to-end, would stretch from London to Bristol.

Abbots can produce 23.3 Gigawatt hours of electricity each year – enough to power 6,000 UK homes. The site is also supported for a 20-year period by a government-backed Renewable Obligation Certificate (ROC) subsidy. 

Rangeford Villages – Healthcare – Octopus Inheritance Tax ServiceHealthcare – current example

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

Fiber optic – Octopus Inheritance Tax ServiceFibre optic – current example

Fibre is Fern’s latest pursuit, it made its first two acquisitions in 2019, purchasing operators: Jurassic Fibre and Swish Fibre. 

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 300 local people and its network is now active in eleven towns across the region. Jurassic is the only provider in many of these areas, creating the potential for years of steady demand. 

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. 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 April 2022, Fern Trading has achieved 53.1% growth in its share price, equivalent to a 4.35% return per annum. 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 April 2012 – April 2022. 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. 

Over 4,000 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. 

Investor charges
Full initial charge 3.5%
Wealth Club initial saving
Net initial charge through Wealth Club 3.5%
Annual management charge 1.5%
Administration charge
Dealing fee 1%
Performance fee
Exit fee
Investee company charges
Initial charge
Annual charges 2.5%
All fees and charges are stated exclusive of VAT, which may be applicable in some cases.

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. 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.

Our view

This is the leading inheritance tax investment service of its kind in the UK, having attracted thousands of investors and more than £2.6 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 a number of sectors that 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 then 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.

The details

Sector
Property & renewables
Portfolio size
£2.6 billion
Initial charge
3.5%
Saving via Wealth Club
-
Net initial charge
3.5%
AMC
1.5%
Last updated: 4 April 2022

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