Film Finance – Section 481 investment

Below is a blog on film finance and click here for a link to the Newstalk interview I did this morning as part of my regular slot on Ian Guiders’ breakfast business.

Skip forward to 16mins 20 secs for the start of the interview.

Film Finance or Section 481 investment as it is known is one of the last remaining all source income tax reliefs available. There are two reasons the government has not cut this generous tax relief

1. It works for investors
2. It creates massive employment in the Irish Film industry.

But be aware that this year is the last year the relief will be available to individuals. From 01/01/2015 the tax relief will given directly to the productions companies cutting out the individual investor.

When I think of this relief the term “no brainer” often comes to mind.

In simple terms what happens is an individual invests money into a qualifying film or tv production. Any one individual can invest up to €50,000 but that individual needs to ensure that they are paying tax at the higher rate (41%) on at least the same level as the investment. i.e. if you only pay 41% tax on €20,000 of your income there is no point investing any more than €20,000 into a section 481 investment.

Lets say the investment is €50,000. A lot of people who have to pay tax at 41% don’t have €50,000 lying about so there is the option of investing €17,500 of your own cash and borrowing €32,500. Your full €50,000 is typically given to a special purpose vehicle which has been set up for the purposes of the production you are investing in.

When the production is complete and tax relief has been granted the investor loan is paid back in full by the production company (including the interest)and the tax relief is paid out to the investor.

The tax relief paid out on €50,000 is €20,500. In this scenario it represents a gain of €3,000 to you the investor (€20,500 – €17,500 cash invested)

In simple terms you invest €17,500 of your own cash, you sign a loan application for €32,500. You end up with your loan cleared including interest and the tax relief pays you back your €17,500 plus an additional €3,000. Assuming this all happens 12 months after your investment it represents a return of over 17% on your cash.

So what are the risks?

Firstly not all sections 481 schemes are the same. We would recommend you get one that is pre-sold. A great example of this is love/hate. Each year they have raised the money in this way to make the series. The beauty of it is RTE had already signed on the dotted line to buy the show once it is finished. The gives great security to investors.

But investors should be aware even if a production is pre-sold the production still has to be completed. So if for whatever reason it is not completed the guarantee is out the window.

Legal contracts between tv stations and production companies are as complicated as you might imagine that is why when I have clients investing in Section 481 I only use specialist firms who specialise in packaging these schemes. The firm I use only deals with pre-sold productions and has the most impressive back catalogue of previous projects it reads like an IFTA shortlist.

There is also the risk that you won’t be granted the loan because you have a problem with your credit rating. Your credit might be good enough to get a car loan or even a mortgage but this relief is so generous and there is no shortage of people investing the appointed bank will be extremely choosy on who they give loans out to on it.

You could of course not borrow and invest all the money yourself but you of course would have to have the money.

As regards borrowing the money the loan is in your name if anything goes wrong you are fully liable for the loan.

One of the other risks would be that the government change the tax legislation or the production fails to qualify. Again using a firm that specializes in this area limits this risk.

We currently have access to a pre-sold production of a very popular tv series, if you would like further information or would just like to chat more about this or any other topic please contact me on eoin@prosperous.ie or 087 6445533.

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