The Inheritance Tax Service holds an investment in one or more unquoted companies that qualify under the government rules relating to business relief. This is a well-established form of tax relief that means all qualifying investments become exempt from inheritance tax after they have been held for two years, provided they continue to be held at the time of death.
The underlying investments of an EIS or VCT are usually held in very small UK companies. As such there is a risk that any of these investments may not perform as hoped and in some circumstances may fail completely.
The Octopus Inheritance Tax Service
St. James's Place is pleased to introduce you to the Octopus Inheritance Tax Service (Octopus ITS), a solution developed and marketed by Octopus Investments, which invests in a portfolio of unquoted shares which qualify for Business Relief (BR).
What is Business Relief?
Business Property Relief, now referred to as Business Relief, was introduced in 1984 principally to enable privately owned businesses to be transferred between generations without suffering inheritance tax (IHT). Prior to its introduction, family owned businesses frequently had to be sold in order to fund the tax liability that arose on the death of the owner.
By investing in the shares of an unquoted trading company (including some of those listed on the Alternative Investment Market) it is possible to benefit from BR at 100%, removing the value of the share(s) from your estate after just two years which, provided they are held on death, can provide significant IHT savings.
To qualify for BR, you must invest directly in the shares of individual companies, rather than through a pooled fund. Like many providers, Octopus has chosen to adopt a ‘portfolio’ approach in order to achieve diversification.
Why invest in shares that qualify for BR?
For many investors the decision to invest in BR shares is often motivated by a need to mitigate a potential IHT liability, together with the investment opportunities they can provide.
Unlike other IHT and estate planning solutions, BR shares can provide the following advantages:
- They are free from IHT once held for two years.
- They allows you to access part or all of your money at any time – providing flexibility in the event of changing circumstances, including changes in legislation.
- They provide the ability to transfer between spouses without ‘resetting the two year clock’. This means that, for a married couple or civil partnership, only one partner needs to survive for two years for the investment to be exempt from IHT.
- They do not use up the IHT nil rate band (NRB), allowing you to utilise the NRB against less liquid assets, such as your home.
Please note the levels and bases of taxation, together with reliefs from taxation can change at any time. Whilst Octopus only invests in companies which they reasonably believe will qualify for BR, they cannot guarantee that they will continue to qualify at all times thereafter.
It is important to note that the two year period for BR starts when Octopus invest into qualifying companies, rather than the date on which the subscription is made. Any money raised is typically invested promptly after the cheque is cleared.
What is the Octopus ITS?
The Octopus ITS aims to provide investors with the opportunity to invest in UK smaller companies that qualify for BR. Whilst the underlying companies perform a variety of different trades, Octopus aims to achieve a modest return.
Whilst Octopus seeks to invest in companies that typically carry a lower risk than normally associated with unquoted UK smaller companies, it is important to note that this does not mean the investment is guaranteed against loss. These companies are likely to carry a higher risk than companies quoted on the stock market and may be a constituent part of an index such as the FTSE All Share Index and investors may get back less than their original investment, particularly if one or more of the smaller companies in which the investment is made fails. It is for this reason St. James's Place only recommend the Octopus ITS to investors who are willing and financially able to take a high level of investment risk.
The investment strategy of the Octopus ITS is to achieve a target return of 3% per annum. However, there is no guarantee or promise that this will be achieved and investors could get back less than the amount invested.
Who is the Octopus ITS suitable for?
The Octopus ITS is suitable for investors who are prepared to accept a high level of investment risk and who wish to:
- Mitigate inheritance tax.
- Retain access to, and control over, their investments.
- Maintain the ability to restructure their investments should circumstances changes, including changes in legislation.
- Invest for at least two years.
- Invest through investments linked to the stock market and understand that they may get back substantially less than the amount invested.
- Accept the additional risk of investing in unquoted UK smaller companies such as those that qualify for BR.
- Accept the risk that the tax benefits may be outweighed by the losses to capital if the BR shares should fall in value.
How is the investment structured?
When investing in the Octopus ITS, investors will be investing directly in a small portfolio of unquoted UK smaller companies, rather than a pooled investment. Investors will directly own the shares in these companies, although Octopus will hold these on their behalf.
The investment will typically be spread across a number of companies.
When can money be taken out?
It is important to appreciate that investments in unquoted companies are not easily liquidated and hence delays may be experienced when extracting money in the future. Whilst Octopus aim to action withdrawal requests within one month, in exceptional circumstances it could take considerably longer.
Whilst investors can request the withdrawal of their investment, either in full or in part, at any time, shares in unquoted companies may not be readily realisable and any withdrawal can only be made if the shares can be sold. Therefore, the timing of any withdrawal cannot be predicted. When money is withdrawn, the proceeds will not be exempt from IHT.
This document is intended to highlight some important aspects of the investment, rather than providing full details. It must therefore be read in conjunction with the Octopus ITS brochure produced by Octopus, which you should read carefully. In the event of any conflict between this document and the brochure, the provisions set out in the brochure should take precedence. Information on tax rates can change from time to time.
There is a risk that these types of investments may not perform as hoped and in some circumstances, may fail completely, so should not be considered unless you are willing to accept a high level of risk. The levels and bases of taxation, and reliefs from taxation, can change at any time.