The glamour of the silver screen continues to lure UHNW investment in film
Robert Macro, partner at Penningtons Manches, gives advice to the UHNW clients willing to invest in the film sector.
Is film a popular investment for the UHNW clients?
The glamour of the silver screen and its connection to the famous has always made investing in film attractive to ultra-high net worth clients. In the past, significant tax advantages augmented the non-business reasons to invest. However, over the last decade, many tax incentives have been withdrawn and more recently there have been a number of cases related to tax schemes which have failed. After the schemes failed, those who invested were and are still being pursued by HMRC. As a result, film investment has been hit and many smaller projects now find it difficult to source funding.
Why do UHNWs invest in film?
Generally there are two reasons to be involved in film. Firstly, significant tax advantages can be obtained if the project has been properly structured to qualify for the Seed Enterprise Investment Scheme (SEIS) and the Enterprise Investment Scheme (EIS) relief. The application of both SEIS and EIS is not controversial and, provided the company qualifies, HMRC will not query the relief. This allows a UHNWI to obtain tax relief provided they pay UK taxes. The application of the reliefs can significantly reduce the cost of an investment and enhance returns. Secondly and more importantly, it is because the investor believes in the project.
A film company can qualify as a trading vehicle and therefore may also qualify for Business Investment Relief to allow foreign income and gains of a resident non-domiciled individual to be remitted to the UK tax free for the purposes of an investment. This can make an investment very attractive for the non-dom community looking to invest in UK film.
What are the main difficulties in investing in film?
One of the main problems is that often the film industry does not have the connections to the UHNW community so the opportunities simply do not present themselves. Investor protection will often prevent general advertisements seeking funding.
In addition, since many films in the UK are produced on a limited budget, there are difficulties in the front loading of legal spend. This tends to inhibit the production of a document outlining the investment opportunity which complies with investor protection legislation in the UK. Any documentation that does not look professional will immediately make the UHNW community suspicious since it is used to seeing well-presented and researched investment opportunities. Instead of investing in quality advice and looking for connections with the UHNW community, the film industry tends to stick with those it knows — it is a vicious circle.
What do you recommend clients ask for if planning to invest in film?
The first thing to look for is a prospectus setting out the investment. If there is one, the client needs to ask whether a professional company has prepared the budget. Also, has the company sought or does it promise to obtain approval from HMRC in respect of qualification for SEIS and EIS?
Another thing to watch out for are the returns and the ordering of those returns. How much funding does the film need to raise and if the client invests early is there an enhanced return? What protection does he have as an investor and is there a shareholders’ agreement?
It’s also a good idea to meet the director and the producer, and ask them whether the key talent is already attached to the project and whether the film company owns all the rights necessary to make the film.
Finally, many UHNW clients simply want to invest in this film as a project regardless of all the business reasons. Just like with arts, they are free to invest in whatever they enjoy.
One last thing every client should ask for is a film credit —- if nothing else, on release it means they can go to the Cannes Film Festival.