Sales of the vehicles for the current tax year set to match the £1bn raised during 2000/01
Sales of film partnerships in the current tax year look set to match the £1bn raised in 2000/01.
While sales of VCTs and Enterprise Investment Schemes have not been strong, film partnerships are the one area of the tax-efficient market that has continued to sell well.
The alternative investment vehicles have proved extremely popular with top stockbroking firms and high-end intermediaries, principally because they provide a means of deferring large tax bills for up to 15 years.
For example, under normal circumstances, an investor faced with a tax bill of some £100,000 following the disposal of assets would have to pay the Inland Revenue upon demand.
Instead of paying this immediately, however, the investor could choose to shelter the £100,000 in a film partnership. These typically last 15 years, although schemes with a shorter duration are relatively common.
The most common type of film partnership is sale and leaseback. Under this type of scheme, investors use the money earmarked for the payment of capital gains or income tax to purchase an interest in a partnership that uses the money to buy the master negative to a recently completed film.
Investor contributions tend to account for between 15% and 22% of the sum required to buy the negative, with the additional funding borrowed from a financial institution.
The master negative is then leased to a distribution company for the length of the scheme's life.
In return, the partnership receives a sum or an income from the distribution company each year from the receipts of the distribution deals it makes. This will be enough over the life of the scheme to pay off the loan used by the partnership to help finance the deal, and the interest incurred on it.
At the end of the scheme's life, the master negative is either sold on or ownership passes to the distribution firm.
Once the loan is paid off, the tax bill on the partnership's annual income is rolled up and divided equally between the investors, who must then meet their share of the demand.
Ian Pugh, an analyst at Allenbridge, said: 'A 'vanilla' sale and leaseback deal is analogous to receiving a 15-year loan.
'The rate of interest on the loan is referred to as the hurdle rate. It is this rate the investor must achieve on free funds to break even on the loan over time. Typically, this is between 4% and 5% per year, assuming tax rates remain at 40%.'
The minimum investment in this kind of product is typically £100,000, although it can be lower.
Costs are also relatively minimal, with initial fees around the 1.5% mark. This would normally be split between the provider and intermediary.
As a rule, unlike other tax-efficient vehicles such as VCTs, sale and leaseback schemes should not be considered an investment option as there is often little in the way of upside return.
Pugh recommends treating them as a tax planning tool instead.
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