... And action! Investors seek a box-office smash

Sam Dunn reels out the risks and rewards of backing British films

The Cannes film festival opened last Wednesday with just one British contender in the main competition, Peter Greenaway's The Tulse Luper Suitcases, Part I: The Moab Story. That may have been on the mind of the veteran actor and film-maker Lord Attenborough as, just 24 hours earlier, he made a vigorous defence of the importance of film investment before a parliamentary select committee.

But while our movies may not be dominating the awards, a number of British film and television companies have taken advantage of government tax breaks in the past couple of years to persuade investors to back their ventures. And investors can't get enough of them: plans for a new series and film of 1960s TV hero Captain Scarlet recently attracted £6m from around 150 people hoping to make money from the indestructible one's appeal to new generations.

But investors planning to buy into a slice of screen history should be aware that they are backing what is often little more than a fledgling project. Putting your money behind home-grown talent is high risk, with the Government imposing strict limits on the amount that can be raised when distribution deals aren't even at the planning stage.

The simplest way to invest is via an enterprise investment scheme (EIS), a company set up to finance projects ranging from films to pubs. An EIS allows you to put in as little as £500 a year and get 20 per cent income tax relief on your investment, up to a limit of £150,000. Investors don't have to pay capital gains tax on any share sales, either, as long as they stay in the scheme for at least three years.

An independent financial adviser (IFA) will guide potential investors through the complex EIS structure but the key is the film's potential for success. Returns on your investment should rise in proportion to any growth the film company achieves, particularly if the production takes off and becomes a hit.

Meanwhile, a Hollywood-style incentive allows EIS film companies to give you the chance of a walk-on part in the movie. You may also get to meet the stars and attend the premiere.

But beware, warns Meera Patel of IFA Hargreaves Lansdown: you need to look past this glitzy packaging. "Getting into films can be pretty high risk," she says. "You have to know the industry very well before you put your money into it.

"The film industry is very competitive. Maybe your film could turn into an unbelievable hit, and as an investor you may get a walk-on part. But all this is psychological. From an investment point of view, you need to get past the smoke and mirrors."

Trying to work out what chance the film has of becoming a hit is tricky. Martin Churchill, editor of Tax Efficient Review, an investment information web- site, says: "For comparison, if you invest in BAE Systems, you know the company size, what its contracts are and who its com- petitors are. I don't think people fully understand the risks of films; it's a very different game."

David Knight, director of tax shelter research at broker Allenbridge, says: "EIS and films can go quite well together, but from another point of view, it's a highly speculative investment [which comes with] some tax breaks."

A second investment opportunity comes in the shape of film partnerships. These schemes do not produce movies but acquire completed films, either for the big screen or TV, and then lease back the distribution rights.

From a tax perspective, the acquisition of a film is treated as a loss, which investors can set against income for up to three years retrospectively. However, these schemes are best suited to high earners: the minimum investment tends to be about £10,000.

Stockbroker Teather & Greenwood offers a series of film partnership schemes under the name of Take, which has so far backed movies including The Heart of Me, starring Helena Bonham Carter, and I Capture the Castle, with Tara Fitzgerald.

But Matthew Brown, marketing manager at Downing Corporate Finance, says: "A film partnership is a method of deferring tax for wealthy investors so they can reduce their debt."

But not everyone who invests in the film industry gets to rub shoulders with the stars. Last year, Red Light Runners, a gangster movie starring Michael Madsen and Vinnie Jones, found new backers and gave EIS investors their money back just three months after its first appeal.

To see what EIS initiatives are available, go to: www.taxshelterreport.co.uk