Octopus inheritance tax scheme used pensioners' cash to fund its struggling firms

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Thousands of investors were exposed to a £42million loss following the collapse of a single hospital chain.

Around 18,000 pensioners who invested in an inheritance tax scheme operated by Octopus Group unwittingly saw their money channelled into failing hospitals and care homes that the group itself owned.

The Octopus Inheritance Tax Service (OITS) attracted retirees by promising to reduce their inheritance tax liabilities through qualifying business investments.

Their capital was directed into Fern Trading, a vehicle holding roughly 300 firms across the energy, property and telecoms sectors.

But Fern also quietly directed investors' funds towards troubled enterprises in which Octopus Group held separate stakes, without making these connections fully transparent to the pensioners whose money was at risk, The Telegraph reported.

Several of these ventures subsequently collapsed, leaving investors nursing substantial losses, including a £42m hit on a single failed hospital chain.

The energy, property and telecoms businesses within Fern Trading's portfolio of approximately 300 companies served as the primary attraction for investors signing up to OITS.

What pensioners were not always told, however, was that Fern was simultaneously lending their cash to businesses in which Octopus Group held its own financial interests.

Octopus maintained that these connections were not material to the product's performance.

The firm's own investment literature does acknowledge that conflicts of interest may arise when financing flows to companies within the broader Octopus Group, and that the group could benefit financially from such arrangements. Pensioners, however, would not share in any profits generated at that level.

Industry figures and former staff at Fern-owned companies have previously raised concerns about whether investors received adequate information regarding their investments' performance.

The starkest example of these undisclosed connections involves One Healthcare, a private hospital group in which Octopus Group held a stake.

Fern extended £64million in loans to the company, but when One Healthcare encountered serious difficulties, the debt had to be written off entirely.

Fern was forced to assume control of the hospital chain from the wider Octopus Group. Pensioners who had backed Fern via OITS ultimately bore a £42million loss on the investment.

While investors were informed about the financial hit from the failed loan, a critical detail was withheld: Octopus Group's own ownership interest in One Healthcare was never disclosed to them.

The omission meant pensioners had no way of knowing their money was being lent to a business their fund manager itself partly owned.

A similar pattern emerged with Rangeford, a retirement village developer that was also an Octopus Group venture.

Fern channelled pensioners' money into the company through loans, but the project was beset by cost overruns and significant delays.

When Rangeford proved unable to service its debts to Fern, the loan was written off and Fern instead took ownership of the developer.

Once again, OITS customers were kept in the dark about the fact that Rangeford had originally been backed by Octopus Group.

The connection between their fund manager and the struggling business was never communicated to them.

Fern is understood to have no remaining loans outstanding to Octopus Group companies. The OITS brochure does note that "portfolio companies" could trade with or provide finance to other Octopus-owned or managed firms.

Andy Agathangelou, who founded the consumer advocacy group Transparency Task Force, said the revelations posed fundamental questions about investor trust.

"These latest findings raise serious questions about whether Octopus has met the standard of transparency that investors are entitled to expect in a complex inheritance tax investment structure," he said.

He added: "Ultimately, this is about trust. Investors making inheritance tax planning decisions are placing considerable reliance on the investment manager to act as a faithful steward of their capital."

Octopus maintained that all financing provided by Fern to connected companies was scrutinised by its investment committee, conflicts committee and Fern's board, with an independent party also reviewing its conflicts approach. All loans were extended at commercial rates.

A spokesman for Octopus Investments said: "We're committed to communicating openly with investors and their advisers, continually improving the information we provide, and focusing on delivering positive long-term outcomes for shareholders."