Film industry investments
Discussion
This is vague, but a friend who spends his life collecting big bonuses in the city was alluding to his latest 'tax break' in investments in the film industry where HMG offers significant tax breaks, enough for him to set up a film production company.
He suggested that a £17K investment was made up to £100K in tax breaks. Even if the investmnet then flopped, you had your 83K allowable loss against other income streams
This sounds a bit like the old 'shares donated to charities' thing whereby celebs bulk bought shares at 1p a time, watched the share price increae arrtificially to 15p a a result of the bulk purchasing, then gave them to charity, this getting 15 x their investment in allowable donations?
Is that right?
He suggested that a £17K investment was made up to £100K in tax breaks. Even if the investmnet then flopped, you had your 83K allowable loss against other income streams
This sounds a bit like the old 'shares donated to charities' thing whereby celebs bulk bought shares at 1p a time, watched the share price increae arrtificially to 15p a a result of the bulk purchasing, then gave them to charity, this getting 15 x their investment in allowable donations?
Is that right?
Scion Financial Partners do this kind of thing. Some useful info here:
http://www.theopusgroup.co.uk/PDF/Investing_in_Fil...
http://www.theopusgroup.co.uk/PDF/Investing_in_Fil...
Historically, the majority of investments into film partnerships have been into passive film leasing
partnerships, which have benefited from specific tax legislation applying to qualifying British films
to enable them to write off (for tax purposes) the cost of producing, or acquiring, a British film.
This resulted in an accelerated tax loss which could then be shared amongst the partners of the
partnership. This relief is commonly known as “Section 42” relief or “Section 48” relief.
Although this relieving legislation is being phased out (it now only applies to films in production
as at 31 March 2006), investors continue to invest in a type of film partnership generally referred
to as a “GAAP Partnership”. These new partnerships combine a real equity investment in the
underlying films with a measure of tax relief, which will depend on the actual performance
of the film. These partnerships prepare their accounting statements based on UK Generally Accepted
Accounting Principles (“GAAP”). They are very different to the leasing partnerships which investors
may be familiar with. This type of investment is likely to suit investors who are interested in
benefiting from the upside from the underlying films, while using the tax reliefs that may arise
in the early trading years to limit the downside.As an investment in a GAAP Partnership is a real investment in the underlying films, it is important
that investors understand the financial analysis of the investment.
An investment into any film partnership requires an upfront cash contribution from the investor for
a percentage of the total investment, with the remainder being provided through a full recourse
loan (the “Loan”) to the investor. The Loan will usually be arranged by the fund operator, and in the
case of the Scion Premier offer the Loan is provided via an offshore Scion group entity.
The Scion Premier offer requires an upfront cash contribution of 28%, with a Loan of 72%.
The following sets out an illustration of an investor’s initial cash flow, based on certain assumptions
including inter alia a £100,000 investment by an investor paying 40% tax, where the cash contribution
is 28% and the Loan is 72%:
The exact timing and amount of tax relief will depend on a number of factors, including the
investor’s personal circumstances. The Partnership will usually file accounts after the end of the
fiscal year, and will provide investors with loss certificates shortly after that time.
During the life of the investment, income generated by the films in the Partnership will flow through
the Partnership, after the deduction of certain expenditure, including print and advertising expenditure,
exhibition costs and distribution expenditure (“film income”). The investor is then able to use part
of this film income to repay the Loan, and retains the remainder. The exact split will vary from film to
film, although it is expected that the Partner will have to allocate at least 55-60% to loan repayments
but be entitled to retain the balance.
In the above example, for every £1 of film income that flows through the Partnership, the investor
is entitled to retain 45p, and must apply 55p towards repayment of his or her Loan. Due to the
nature of the accounting arrangements, the first 15% of film income received will be matched
against the remaining net realisable value of the work in progress, and so will be received by
the investor tax free. Thereafter the investor will pay tax on all film income received through the
structure (which can be funded from the 45p retained by the investor). If the investment into the
Partnership can be combined with other forms of tax planning – for example pensions contributions
– the investor could be entitled to retain the full 45p of each pound free of tax.
partnerships, which have benefited from specific tax legislation applying to qualifying British films
to enable them to write off (for tax purposes) the cost of producing, or acquiring, a British film.
This resulted in an accelerated tax loss which could then be shared amongst the partners of the
partnership. This relief is commonly known as “Section 42” relief or “Section 48” relief.
Although this relieving legislation is being phased out (it now only applies to films in production
as at 31 March 2006), investors continue to invest in a type of film partnership generally referred
to as a “GAAP Partnership”. These new partnerships combine a real equity investment in the
underlying films with a measure of tax relief, which will depend on the actual performance
of the film. These partnerships prepare their accounting statements based on UK Generally Accepted
Accounting Principles (“GAAP”). They are very different to the leasing partnerships which investors
may be familiar with. This type of investment is likely to suit investors who are interested in
benefiting from the upside from the underlying films, while using the tax reliefs that may arise
in the early trading years to limit the downside.As an investment in a GAAP Partnership is a real investment in the underlying films, it is important
that investors understand the financial analysis of the investment.
An investment into any film partnership requires an upfront cash contribution from the investor for
a percentage of the total investment, with the remainder being provided through a full recourse
loan (the “Loan”) to the investor. The Loan will usually be arranged by the fund operator, and in the
case of the Scion Premier offer the Loan is provided via an offshore Scion group entity.
The Scion Premier offer requires an upfront cash contribution of 28%, with a Loan of 72%.
The following sets out an illustration of an investor’s initial cash flow, based on certain assumptions
including inter alia a £100,000 investment by an investor paying 40% tax, where the cash contribution
is 28% and the Loan is 72%:
The exact timing and amount of tax relief will depend on a number of factors, including the
investor’s personal circumstances. The Partnership will usually file accounts after the end of the
fiscal year, and will provide investors with loss certificates shortly after that time.
During the life of the investment, income generated by the films in the Partnership will flow through
the Partnership, after the deduction of certain expenditure, including print and advertising expenditure,
exhibition costs and distribution expenditure (“film income”). The investor is then able to use part
of this film income to repay the Loan, and retains the remainder. The exact split will vary from film to
film, although it is expected that the Partner will have to allocate at least 55-60% to loan repayments
but be entitled to retain the balance.
In the above example, for every £1 of film income that flows through the Partnership, the investor
is entitled to retain 45p, and must apply 55p towards repayment of his or her Loan. Due to the
nature of the accounting arrangements, the first 15% of film income received will be matched
against the remaining net realisable value of the work in progress, and so will be received by
the investor tax free. Thereafter the investor will pay tax on all film income received through the
structure (which can be funded from the 45p retained by the investor). If the investment into the
Partnership can be combined with other forms of tax planning – for example pensions contributions
– the investor could be entitled to retain the full 45p of each pound free of tax.
Edited by Brown and Boris on Tuesday 7th April 10:15
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