Not many people realise it, but the UK has the fastest-growing cinema industry in the developed world.
In 2004 the industry contributed £3.1bn to the country’s gross national product, and generated £850m in tax revenue. Last year eight out of the UK’s 20 biggest box office hits were domestic productions. The only countries with faster-growing film industries are powerhouses of the developing world – Russia, China, India and Mexico.
You don’t have to be a cigar-chomping movie mogul to take part in the industry. Direct investments in film projects are possible if you can spare at least £25,000, and individual investors account for about 10 per cent of the sector’s financing.
If you’re attracted by the glamour, investing in the film industry may suit you – some investors are offered the chance to appear in walk-on parts in the films they finance, and to rub shoulders with the stars at the premiere. In Four Weddings and a Funeral, for example, some of the best lines were delivered by the people who put up money to have the film made.
But don’t invest in films in the hope of a big return – with most schemes you will end up getting back less than you put in, with an average capital loss of 20 per cent, although, by cleverly using tax breaks, investors can make a decent return. In spite of the prospect of losing money, investing in films can still be a sound move if you want to reduce your tax bill.
Traditionally, the best way to do this was to use a “section 48” scheme that allowed you to write off your investment against your income tax bill in a single year. So if you earned £100,000 in a tax year and invested £30,000 in a film, you would pay income tax on only £70,000 of your income.
With a top income tax rate of 40 per cent, that would save you £12,000. However, you would have to pay tax on income you received from the film in later years, so effectively you would be deferring a tax payment, not avoiding it altogether.
Robert Reid, managing director of Syndaxi Financial Planning, says some people get a nasty surprise later on: “You get so much tax relief upfront, you forget the tax bill at the end.” Given this effect of film finance schemes, he says he “won’t touch them with a barge pole”.
Some section 48 schemes also involve heavy borrowing, which means you can write down a much greater amount than the sum you put in – for example, paying in £30,000 and shielding £100,000 of your income from the taxman.
Moreover, sale and leaseback deals were used to avoid the risk of a section 48 scheme. This involved buying the ownership of a film from its producer, then leasing it back at a pre-arranged cost, thus creating a fixed stream of revenue from your investment.
As a result, investing in films has become popular among investment bankers, Premiership footballers and other high earners as a reliable tax avoidance scheme. For the chancellor, this is a red rag to a bull – he ruled that projects that started filming after April 1 this year would be ineligible for section 48.
However, there are still at least two tax-efficient ways to invest in films – but both are riskier than section 48.
The main one is a based on generally accepted accounting principles, or Gaap. A Gaap film investment scheme, like a section 48 scheme, allows an investor to defer tax liability. It can be used to invest in international projects, whereas at least 70 per cent of a film’s production budget must be spent in the UK to qualify for section 48. But it is not allowed to use sale and leaseback to mitigate risk, so you can end up losing a big part of your investment.
“Gaap is becoming the main offering now,” says Anne Morrison, a tax partner at accountants Baker Tilly.
Gaap schemes limit the risk to investors by pooling money and putting it into a range of projects. If you want the personal involvement that comes from investing a sizeable sum in a single film, you can do so using an Enterprise Investment Scheme (EIS).
An EIS offers a number of tax advantages: as well as shielding the investment from income tax, it offers inheritance tax relief and the chance to defer capital gains tax from a previous investment.
The tax relief is at a rate of 20 per cent – so for every £10,000 you invest, you reduce your income tax bill by £2,000. The maximum investment eligible for income tax relief is £200,000 a year, creating a maximum tax saving of £40,000.
CGT is deferred at the full rate of 40 per cent, so you pay no CGT upfront on investments that you roll over into an EIS. But, unless you die or roll over your EIS investment into another scheme, you will eventually have to pay your original CGT bill.
If you stay in the scheme for at least three years, you pay no tax on your profits. There is no limit to the amount of CGT deferral per year – but bear in mind that if you invest more than £200,000 in a single tax year you will not be able to claim income tax relief on the full value of your investment.
