Film Partnerships Thriving In London

by Jason Gorringe, Tax-News.com, London

14 January 2002

The Tax Efficient Review, a UK publication which reports on the performance of Venture Capital Trusts, now has a section devoted to Film Partnerships. They were introduced along with an attractive tax regime meant to attract investment into the British film industry, initially in 1992 and then in enhanced form in 1997. They allow production costs to be written off against tax, initially over a three-year period, now over one year. The concession applies until July 2005.

Investments into film partnerships can be very useful to people with serious amounts of income or capital gains to shelter, and who have substantial amounts of surplus cash. Martin Churchill, editor of the Tax Efficient Review, says: "They offer unusually broad cover, allowing you to shelter unlimited amounts of both income and capital gains."

They also have the advantage of sheltering tax due on current and preceding year income and gains, and allow recovery of income tax paid for three years back. They are used typically as an income tax shelter for people who are exercising large share options or have received big bonuses.

Two types of film partnership are being marketed: sale and leaseback schemes, which are the most popular, and film production schemes. With the former, there is no film risk, but also no potential profit, while the latter offers real investment in film or TV productions and has some profit potential.

Sale and leaseback schemes essentially offer tax deferral over an extended period, typically 15 years. In effect, they break down one large tax bill into 15 small ones.

Firms offering the schemes put together partnerships of up to 20 people. The partnership then buys the master negative of a qualifying film, to which the tax breaks attach, and the distribution rights, to which the film risk attaches. It leases the distribution rights back to the film producer for 15 years, but keeps the master negative.

A typical investment in a film partnership is £400,000 to £500,000, but some investors put in much larger amounts. Minimum investment is usually £100,000. Investors provide a small proportion of the investment in cash, usually 15-20%, with the remainder borrowed from a bank. They get 40% higher rate tax relief on the whole amount thanks to the tax concession which allows the partnership to write off 100% of the acquisition costs of the film. So an investor putting up say 18% in cash would get a return of £22,000 on a £100,000 gross investment (£40,000 of tax relief less £18,000 cash outlay).

The producer pays an annual rental that equals the capital and interest repayments on the bank loan taken out by investors, with the rent usually increasing at 5% a year. This is generally secured by a bank guarantee. These payments constitute taxable income for the partnership, so the £22,000 tax rebate received up-front will be repaid to the Inland Revenue over the 15-year lease period. At the end of the period the partnership is wound up and the tax liability has been discharged.

There are few risks associated with sale and leaseback schemes. Film production schemes appeal to investors who are prepared to accept some risk of loss in exchange for a potentially good return. Rather than buying and leasing back a film already made, the partners fund selected film or TV productions and earn a return by selling them. This obviously requires more specialist knowledge of the film industry, but some London investment houses have constructed schemes which are largely risk-free by learning how to pre-sell distribution or other subsidiary rights.

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