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Film, camera, inaction

Cater Barnard is the latest financial services group to try to lure investors into a tax-efficient film partnership. More ambitious than most, it is seeking £50m to set up a vehicle to fund UK films with the support of entertainment financier Comerica Entertainment Group.

The partnership has impressive backing. Around 20 of the UK&#39s leading filmmakers, including David Parfitt, the producer of box-office hits Shakespeare in Love and The Madness of King George, are offering support.

But, common to most schemes, investors need a substantial minimum investment to qualify – in this case, £50,000 with £10,000 increments.

Plan Invest joint managing director Mike Owen says: “A lot of IFAs have high-net-worth clients who they do not really want to put into property or much else. These sort of schemes appeal because of the tax advantages but I would need to know a lot more before I would recommend them to a client.”

There are a variety of ways to invest in films but all seek to mitigate income, capital gains and inheritance tax. Possibly the best known is the enterprise investment scheme, which offers 20 per cent income tax relief and CGT exemption if held for at least three years. It also allows deferred relief on assets disposed of less than 36 months before the EIS investment.

But the EIS has its critics. A number of IFAs say the 20 per cent tax break is not enough to justify the risk associated with film productions. Alternative investments include sale and leaseback schemes and production partnerships. The latter allow a 100 per cent tax write-off for films with budgets below £15m.

This makes investing in films more appealing than through an EIS, according to Movision Partnership, a production company specialising in films which fall under section 48 of the Finance Act 1997, which allows the tax break.

Director Peter James says: “We are providing a very low-risk investment. Investors can still profit even if the films do not make their money back. We make tough deals. They will certainly get a better return than is realistically available on the stockmarket.”

The reason why such investments are low risk, according to James, is the way that films are financed. For example, 50 per cent of the cost of one Movision film shot in Italy was put up by the Italian government in the form of grants while the rest was financed by the production scheme and money lent by media banks. As only the bank and the scheme holders have equity stakes, they receive any revenues first.

There is also a raft of hybrid schemes emerging, comprising elements of different partnerships. This makes it even harder for IFAs to negotiate the technical complexities of these schemes.

Some of the people running these schemes admit that the structures are overly complicated. Park Caledonia Group senior adviser John Ditchfield says some sale and leaseback schemes – where the partnership buys a film&#39s master negative and leases it back to the producer – have ignored investment potential. He says: “Most IFAs go for these schemes because of tax but they do not know how producers bring together the financing. Some sale and leaseback schemes do not offer profit participation. It is just treated like a loan from the Inland Revenue. The quality of film is secondary to the tax breaks. But investors can make money from the success of a film.”

Ditchfield, who is trying to raise £22m to part-finance 40 films, says IFAs should consider films as an asset class in their own right. To this end, PCG is running educational seminars to help IFAs understand them. But it is not only education that is needed – another reason IFAs cite for their reluctance to recommend the schemes is lack of access.

According to the latest edition of Allenbridge Group&#39s tax shelter report, there are only around 15 sale and leaseback schemes and production partnerships, some of which are closed or set to close when no further funds can be committed to films this year. The report predicts there will be “very little new product” released before the end of the tax year. This has come as a disappointment to some IFAs but others remain indifferent.

Hargreaves Lansdown investment manager Ben Yearsley says: “You wonder why films go to EISs or partnerships. Are they not good enough to get financing through the normal channels? You can use them as a form of cheap loan but with base rates so low there is no need to take the risk.”

One of the higher-profile EIS-sponsored films of recent times – a heist thriller starring Michael Madsen called Red Light Runners – was abandoned after raising only half its £8m budget. The producers were instead forced to refund investors and sign a financing deal with a European company.

It is not that uncommon a story, with too few qualifying films, too few schemes and too few investors willing to take the chance. Unless the firms behind the schemes can push their cause more vocally, that situation seems unlikely to change.

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