Everyone dreams of an investment that produces a return worth 15 times the value of their original stake, especially when it involves rubbing shoulders with glamorous film stars. The King’s Speech, starring Colin Firth and Helena Bonham-Carter, is reported to have taken more than $400m worldwide, despite requiring just £10m of investors’ money to make.

Sadly blockbusters are rare: you are much more likely to lose all your money than make a fortune through film investment. However, there are ways of reducing the risk depending on how you invest, says Paul Katis, Creative Director and owner of Pukka Films and director and co-producer of the Afghanistan-based war film Kajaki, and Dave Morrison, partner at accountants Nyman Libson Paul, a firm whose clients are involved in all aspects of the entertainment industry, including theatre, film and television.
What are the potential rewards and expected risks of film investment?
Paul Katis (PK): The risks are very high. You are making a one-off product that will either sell in a happy marketplace or flop, in which case you could lose all your money. That happens alarmingly often.

Film funding is rarely 100% raised in the form of equity from investors. Some of the money will come from pre-sales, bank borrowing and gap funding. Even when a film appears to be successful, there will be other funders who are entitled to take their cut first.

Direct investors can also reduce the risk by taking a ‘mezzanine’ approach, putting some of their money into equity funding, and some into gap funding. Gap finance covers the 15% or so that you might need to get the film off the ground once other fundraising has been done. It has first priority in the payment line-up, and usually gets a fixed premium on an annual basis.

With a film costing up to £5m to make, you could need to make more than twice that for everyone to be paid out. The good thing about being an equity investor is, once everyone else has been paid their agreed amount, you are in a majority position for any profits.
The risks are very high. You are making a one-off product that will either sell in a happy marketplace or flop, in which case you could lose all your money. That happens alarmingly often Dave Morrison (DM): Apart from the standard enterprise investment scheme (EIS) and Seed EIS (SEIS) tax incentives, one is unable to make any precise projections until the film is out there. Nobody can tell if it will be a hit or how big a hit it will be. 

An EIS offers tax relief at the rate of 30% of the cost of new shares, set against the investor’s income tax bill for either the tax year in which the investment is made or the previous tax year. Relief can be claimed on up to £1m invested in EIS shares in any tax year, subject to a 30% holding limit in any one company. The shares must be held for three years, after which they are free from capital gains tax (CGT) or, if a loss is made on disposal then the net loss, after taking account of the 30% relief already received, may be set against income or gains. 

EIS shares are inheritance tax free after two years and there is the opportunity to defer any existing CGT liability by rolling the gain in to EIS shares. This may be particularly attractive with the recent drop in CGT rates as, when the gain crystallises at a later date, it will be at the rates at that time. 

Up to £100,000 can be invested in SEIS with income tax relief of 50%. Investors may also benefit from CGT relief if capital gains are reinvested in SEIS shares where 50% of other gains may be written off. Like the EIS, any gains on SEIS shares are tax-free. Loss relief and inheritance tax relief are also available.
Who are the market drivers – the buyers and sellers?
PK: Revenues from theatrical distribution account for only part of a film’s income. There is home entertainment – TV rights, DVDs and streaming through Netflix and others. Beyond your home market, an international sales agent will try to sell the film to distributors in the rest of the world. There are 504 potential territories.

Savvy investors will do due diligence on a film by looking at the international agent’s estimate of how much the film is worth in the world market, whether there is a UK sale arranged, the producer’s reputation – whether he or she has made money on previous films – and the cast and script.

DM: Films succeed if they have good distribution and marketing, so it is the distributors and sales agent selling the film to distributors around the world that drives success, and of course the quality of the film.
What have been some of the big trends in the market?
PK: This is part of the fun of investing in film: making yourself knowledgeable about what the up-and-coming trends are. Hollywood fantasy movies currently dominate the market but independents can thrive with horrors and thrillers, costume dramas and comedy. A genre such as horror can do well in home entertainment with very little help from cast.

DM: The sales agents and distributors are traditionally the people who spot what sells, and buy accordingly. However, digital distribution offers great new opportunities for filmmakers. Time will tell how things evolve, but opportunity exists.
50%
Income tax relief through SEIS schemes on investments of up to £100,000
What’s the experience like for investors?
PK: The investment part of it can be very rewarding, but you could also lose everything. Many people invest because they want to see a particular type of film made. With Kajaki, we approached high-net-worth people in the City who had a military background.

It can also be a lot of fun. You may be invited to the premiere or preview screenings, may receive an opportunity to meet the cast and may even be invited to be an extra. We had the children of one investor doing work experience while we were making Kajaki, and another investor had a part playing the loadmaster on a helicopter. 

DM: It varies from project to project, but I think a lot of investors like the fact they can attend a screening and meet some of the cast and crew. However, too many benefits to investors can restrict their EIS tax relief if the value they receive is too high.
What are the regulatory and tax considerations when investing in film?
DM: Like everything else, the Financial Services and Markets Act 2000 and its subsidiary regulations apply. EIS compliance has become difficult for single film projects due to new rules imposed by the EU before the Brexit vote. But single film projects can still use SEIS money, and multi-project film production companies with a longer-term growth and development ambition can still meet the EIS requirements. 
Meet the experts
Paul Katis is an award-winning director and producer, who has worked in film and television for more than 25 years. His first feature film, Kajaki, won him the Producer of the Year award at the 2015 British Independent Film Awards. 

Dave Morrison is a Partner at accountancy firm Nyman Libson Paul, where he specialises in film investment. He is also Chairman of the Institute of Chartered Accountants’ Entertainment and Media Group. 
The company can get up to a 20% rebate on UK costs for a UK qualifying film. Some projects may treat this as part of the budget funding, but in the case of a film that is already fully funded, this can be seen as a return for investors.
What are the costs of investing in film?
PK: For individual investors who are putting their money in direct, there are no charges. We raised about £1.2m in equity to make Kajaki, and we were accepting investments of £5,000 or more, but most people were putting in between £10,000 and £25,000.

DM: Most film companies raising funds will not charge for investing, although the independent financial adviser introducing the investor may make a charge in the normal way to their client. In the case of EIS funds, there will be costs, but how these are paid for will be particular to that arrangement.
What are the pricing and liquidity considerations? Can investors sell and buy with confidence and ease?
DM: Shares are unlikely to be very liquid and EIS shares are not generally listed. Film shares are unlikely to seek subsequent listings either. EIS rules prohibit a pre-planned exit, so investors must sell shares to other investors to recoup their money or the company can buy them back.

Pricing is likely to start from the film's budget and where the producer thinks he may find investors. However, if the minimum subscription is too low it can result in a large number of shareholders, with the administrative burden that brings with it.