With equity markets volatile and interest rates low, many financial advisers are finding new client opportunities in film finance. Far from ...

With equity markets volatile and interest rates low, many financial advisers are finding new client opportunities in film finance. Far from a fantasy investment born out of sheer love for the cinema or delusions of star-studded screenings, a number of collective investment schemes offer solid client benefits in the form of tax deferral. In addition, some schemes offer a low-risk way to participate in a film’s success. Groups include Future Film, Close Brothers, Grosvenor Park Partnerships and Invicta Capital.

New legislation passed in 1997 was specifically drafted to encourage investment in relatively low-budget UK films extending tax relief granted in 1992, mainly to investors in higher-budget films. The earlier legislation provided broadly for the cost of acquiring a film to be written off over three years, in July 1997, this was extended to allow the whole cost of acquiring or producing a UK qualifying film to be written off in the year the film completes, as long as the film costs under £15m. A film must be certified as having mostly UK participation by the Department of Culture Media and Sport to qualify. Banks rather than individuals have tended to use Section 42 legislation but this has changed since 1997, to the advantage of financial advisers.

"Back in 1997, there was very little communication between the investment and film communities and hardly any feasible opportunity to invest in film,” says Tim Levy, chief executive at Future Film, which helped finance both Enigma and the forthcoming Last Orders. "Since then, Section 48 incentives have crafted an industry worth £1.5bn this tax year. This is a significant pool of money."

Section 48 allows 100 per cent write-off for production or acquisition costs in the year the film is completed, assuming that the film costs £15m or less to make. With a one-year write off, Section 48 instantly made investment in film a much more attractive prospect for high net worth individuals and sparked a growth in UK film investment. This relief has recently been extended until 2005.

Future Film has specialised in sale and leaseback partnerships. In these arrangements, the partnership purchases the master negatives of a film and leases it back to the producer for the next 15 years. This allows for the film to be distributed abroad and sold to video and TV networks.

Financial advisers can benefit in several ways. All partnerships offer commissions for IFAs, often with trail commissions. In addition, IFAs may have a second bite of the cherry when clients receive tax rebates. Equally important, in a market with a dearth of tax advice, these straightforward, government-approved tax-deferral vehicles offer intermediaries a new opportunity to advise on tax.

John Ireland, a principal at the Riverside Partnership, said: "As a financial adviser, I find that people often resist buying more financial products but they like tax-savings ideas. So we position ourselves as tax planners. If we can offer opportunities to wipe out tax liability for the last three years, people are amazed. Most accountants are auditors, not tax planners so there is a real need for this sort of advice."

"Now higher rate taxpayers can shelter their tax liabilities on a deferred basis without limit as far back as the 1998-99 tax year," noted Tracy Benjamin, director at Pinder Fry & Benjamin, a financial adviser.

Benjamin stressed that the structure of the sale and leaseback arrangement guarantees that the investor’s return is not dependent on the underlying success of the films purchased. Under the arrangement, the film producer gets a bank guarantee in return for the rights to promote the film for the next 15 years. In the simplest terms, if the film flops, the investor still gets his tax deferral and the IFA gets his commission. The minimum investment through Pinder Fry & Benjamin is £100,000. “Basically, the investor takes out a personal loan of £82,000,” Benjamin said. Investors put in £18,000 in cash and get £40,000 of tax deferred. Thus, as the bank guaranteed income comes in, it repays the original loan.

IFAs get a commission of 1.25 per cent on the gross amount, but Benjamin said this is more than it sounds. The IFA’s commission amounts to about seven per cent of the cash amount. "True, there’s no upside for the IFA if the film is a hit, but on the other hand once the client has invested and gets a tax rebate, the IFA gets a second sales opportunity. The client will need to invest those funds – the tax rebate – to provide an adequate return to cover any future liabilities and to generate a profit."

Harry Hicks, partner at accountants Baker Tilly, believes that the partnerships work to the advantage of intermediaries. The partnerships vary thus one can meet client needs, he said. "For example, there are sale and leaseback deals for tax deferral. But there are also products that let clients take a punt on film or TV with tax as an incentive, as well as other specialist equity partnerships, particularly in film, with a contracted debt element."

Hicks added: "In view of current low interest rates and the uncertainties of the equities market, a percentage of client portfolios into a tax-incentivised film project is well worth considering, depending on the client’s attitude to risk."

Even stockbrokers are getting into the act. For example, Teather & Greenwood’s TV partnership use Section 48 to attract investors to UK productions with a high degree of tax relief relative to the contribution. Martin Sherwood, director and head of tax-efficient solutions at Teather, said: "Our new scheme, called Take 4, will give the opportunity to invest in a spread portfolio of TV products. The advantage is that TV productions cost a fraction of film, and you can expect tax relief in 12 months."

Designed for high net worth individuals seeking to offset tax, the minimum investment is £25,000, with IFAs receiving a commission of 2.25 per cent and a trail of 0.25 per cent.

Most recently, Close Brothers, which offer sale and leaseback through Grosvenor Park Asset Management, have launched the Close Film Fund, which offers both tax relief and a chance for investors to participate on the upside – if the film is a big success – as the films have been pre-sold to major houses. The minimum investment is £25,000, said Leighton-James Giles, marketing executive. "This results in a nil cash investment for investors who utilise this opportunity."

Commission to intermediaries is offered at a rate of five per cent on the equity invested, with a trail commission of 0.24 per cent for four years – and a further one per cent when the funds are recycled into a second series of productions.

Tim Levy of Future Film summed up the opportunity. "We’re an enabler, providing a bridge between the financial community and the film community. We help films get made."