Investments into this product are split into two pots. The amount which goes into the discounted gift trust element depends on the investor’s forecast life expectancy and annual income requirements. This element is exempt from IHT immediately. The second pot comprises the Octopus secure inheritance tax service and will be exempt from IHT after two years instead of the seven years associated with traditional trusts.
The Octopus Secure ITS invests in companies that qualify for business property relief and aims for net growth of 3 per cent a year. This can be taken as an annual income or as growth. If the annual return does not reach this target, Octopus will contribute up to 3 per cent a year to make up any shortfall but has never had to contribute to the return since the service launched in 2005.
Both the DGT and Octopus secure ITS elements invest into unquoted companies with an emphasis on capital preservation. Investment will be made only into unquoted companies with lower risk business models. Risks are mitigated either by taking out insurance or the way the deal is structured.
For example, the secure ITS invests in subsidiaries of a holding company managed by Octopus for investors called Bracken Holdings.
One of the subsidiaries is a wholesaling business which helps companies improve their short-term cash flows. It does this by buying goods from a company’s suppliers and selling them to the company at cost plus a margin, but with 120-day payment terms which are more favourable than buying directly from suppliers. Risks are mitigated by a pre-agreed credit limit and insuring the wholesale company’s transactions, but some advisers may still think the risks are too high.
Investors cannot change the amount of income they take from the discounted gift trust element once fixed which is a limitation, so will need to draw down any extra income from the secure ITS element.