Film partnerships provide a means of sheltering income and capital gains from tax and were introduce...
Film partnerships provide a means of sheltering income and capital gains from tax and were introduced in 1997 with the aim of helping to finance the UK film industry. They involve sale-and-leaseback deals on the distribution rights of films that have already been made.
Film partnerships are particularly useful to people with significant income tax bills, as the rules allow sheltering of income from up to three years ago. However, they require up to a 15-year commitment and are financially complex.
How does the partnership work? Up to 19 investors put money into a general partnership set up to buy film rights. The minimum investment is between £50,000 and £150,000. Of this sum, the investors put up only 15%-22%, with the rest loaned by a bank. The partnership then buys the rights to one or more qualifying films from a film producer. To qualify, the film must meet criteria laid down by the Government about what is and what is not a British film, so it must already exist.
The partnership then leases the distribution rights back to the film's producer on a long lease ' the maximum is 15 years. The producer pays an annual rental to the partnership that equals the capital and interest repayments on the partnership loan. The lease payments usually increase by 5% a year.
The investment is therefore neutral in capital terms but the benefit is that the whole of the investment qualifies for tax relief in the first year because the partnership can write off 100% of the acquisition costs of the film. Therefore, on £100,000, there will be a tax rebate of £40,000 for an outlay of only, say, £15,000. That tax rebate will then be repaid to the Inland Revenue over the period of the loan, because the capital repayment element of the lease payments will be taxable income for the partnership.
What does the Inland Revenue think of these schemes? Film partnerships have attracted more than £500m so are fairly well-understood and tested by now. Some variants of the scheme allow investors to trade in and out of partnerships, thereby allowing shorter time horizons, but the Revenue has not yet accepted this principle so for the time being the variants are risky.
Changes to the film tax relief regime in the 2002 Finance Act included measures to restrict the main tax relief for British qualifying films with budgets not exceeding £15m. It was restricted to production expenditure that has been paid at the time the film is completed, or is unconditionally payable within four months of the date the film is completed.
We believe investors should be wary about film partnerships as they are complex, unregulated and involve a business commitment for as much as 15 years. Remember that, in a partnership, you are jointly liable along with the other partners, which can be enough risk on its own.
I have carried out in-depth analysis of four schemes this year with a specialist film lawyer who represents, among others, Minnie Driver and Ray Winstone. We decided not to recommend any of them to our clients. The devil is always in the detail and we felt the small print was not specific enough and we would rather our clients avoid these schemes rather than take the risk of investing.
Mark Estcourt is managing director of Cavendish Young
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