Tax breaks on the cutting room floor for film funds

The industry needs cash but it's become harder to make money from it

The world of movies may be all about glamour, celebrity and riches, but the British film industry remains cash-strapped and in desperate need of investment.

Until recently, the Government has tried to help, offering a range of generous tax breaks to encourage wealthy individuals to bankroll film-makers. While the ventures were high risk, the tax breaks were sufficiently generous that the projects could lose quite a bit of money before investors would feel the pinch. At the very least, they served as a means of deferring any capital gains tax liabilities which investors might be facing.

But even before this week's Budget, the Government has been clawing back some of these tax breaks, making the ventures less and less attractive to private individuals.

Earlier this month, the Treasury killed off the most common type of film investment, by scrapping so-called "sideways loss relief". This loophole previously allowed investors to defer their income tax liabilities within film investment plans.

The film industry is nothing if not resourceful, however. And for those who are dead set on investing in the silver screen, there remains a limited number of options.

Even so, Martin Churchill, who runs www.taxefficientreview.com, a website that specialises in analysing and providing information on tax efficient investments, warns that investors should not be fooled into thinking that films are an easy way to make money.

"Let's be clear," he says. "The old sale and leaseback partnerships were not an investment in film. They were simply tax efficient ways of sheltering your income. Investing in film is an incredibly risky business, and most people really don't understand it. Even if the film is a great success, you're still not guaranteed to make any money."

The remaining way for private individuals to invest in film is through one of a handful of Enterprise Investment Schemes (EISs). These offer a 20 per cent tax income break to investors - so each £1,000 investment costs £800 - and also allow you to defer paying tax on capital gains for as long as invest them in the scheme. In addition, if you die while you still own an EIS, your investment is not subject to inheritance tax.

For investors who have capital gains to defer, EISs effectively allow you to buy into your investment at just 40p in the £1. For each £1 you invest, you receive the 20p income tax break, and also defer another 40p worth of tax from your capital gain.

The risk level of film-related EISs varies enormously, however. The Government recently created a new 20 per cent tax credit for film producers. Some EIS-funded films use this money as a security for investors, effectively guaranteeing that they will get back most of what they put in. Others leave investors much more exposed.

For example, if an EIS scheme provides 25 per cent of the overall budget for a film, and the producer pledges to pay back all of his 20 per cent tax credit to the EIS, investors effectively have exposure to only 5 per cent of the film's revenue streams. Although this 5 per cent represents 20 per cent of the EIS, investors will recoup this from their income tax break, leaving them with potentially very little downside.

Other EISs give investors much greater exposure to the film's revenue streams, and to potentially much greater losses. Most of the revenues are bought up by film distribution companies, such as Pathé and Miramax, with EIS investors entitled to a proportion of box office receipts and DVD sales only above a certain level. As a result, films have to be very successful both in the cinema and in the shops for EIS investors to cash in.

Further rule changes in the Budget this week mean that from now on, investors will have to invest in funds of EISs, giving them exposure to a portfolio of films rather than just one or two. However, the same tax breaks and risk structures will apply.

Before you commit to investing in an EIS, you need to be sure that you are happy to part with your money for several years. There is no secondary market for EISs, so you can't just sell out if you decide you need to get your hands on your cash. Also, to qualify for the income tax break and the capital gains tax deferral, you have to hold on to your investment for a minimum of three years. The maximum investment in any one tax year is £400,000.

If the film is particularly successful, there is a chance that the company could be sold to a business that wants to buy the revenue stream. In most cases, however, the company is wound up after a few years, at which time any remaining assets will be returned to investors.

Churchill stresses that investors should really consider investing only if they have a large capital gain to shelter, or are looking to shelter some money from inheritance tax. For most people, these are not suitable investments.

Many wealthy footballers, businessmen and even film stars have lost thousands of pounds on film investments over the past few years, and it remains something of a lottery as to whether you will come out financially better off.

"I'd say that anyone who is desperate to invest in film without taking professional advice should have their head examined," Churchill adds. "It's a very very risky place - the only film I know of that has made a profit within an EIS is Tsotsi."

If your main draw towards film investment has been the tax breaks, it may be worth looking elsewhere.

EISs are now the only place where you can shelter capital gains. However, venture capital trusts offer a 30 per cent income tax break on your investment, and offer investors much more choice. Last year, one VCT was launched that invested in the film industry. However, it managed to raise only £6m and has not come back for any more money this year.

The magnificent seven?

* There are currently seven film EISs available on the market, although it remains difficult to obtain detailed information about some of them without going through a financial adviser.

* A handful of companies in the market do have their own websites, however. This gives you a chance to download investment prospectuses and to read about their previous film successes and forthcoming projects.

* Future Film Group ( www.futurefilmgroup.com), whose previous British films include the likes of Bend It Like Beckham, Mrs Henderson Presents and Young Adam, is looking to raise £8m this year. It is offering investors a relatively low-risk proposition, guaranteeing them most of their money back by making use of the Film Producers' Tax Credit.

* Films from its studio due to be released over the coming months include Flawless, starring Michael Caine and Demi Moore, as well as a Spanish film directed by Antonio Banderas, entitled El Camino de los Ingleses.

* Prescience Pictures ( www.presciencefilm-finance.co.uk), is another film house that's on the hunt for private investors' money this spring. It is looking to raise about £5m for a new project. One of Prescience's latest films, which is due to arrive in British cinemas later this year, is How About You, starring Imelda Staunton and Vanessa Redgrave.

* Visible Films ( www.visiblefilms.com), whose previous films include Sexy Beast, The Libertine and the recently released biopic of Jane Austen, Becoming Jane, is looking to raise £8m. As well as offering investors any upside from its future project, it also promises tickets to the film's premiere, a personally watermarked bound copy of the script and two crew souvenir gifts, as well as a DVD of the end product as soon as it is released.

* Other open EISs include Cinecap Film, Foresight Venture Film, Cosi Films and Azure Media. To find out more details, or to order prospectuses of any of the EISs on offer, visit the website www.taxefficientreview.com. For more general information on EISs, or for specialist financial advice, visit www.taxshelterreport.co.uk.

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