As the April 5th tax year deadline approaches people who want to shelter income from the Revenue Commissioners will find that the options for reducing their annual tax bill have narrowed considerably.
One of the most thriving tax shelters this year is money invested in film production. While it appears that there is still a limited number of Section 23 and Section 48 property investments available, tax relief on these investments is now very limited. And there are few opportunities to cut your tax bill through making an investment in a Business Expansion Scheme (BES).
Relief for investment in film-making is available under Section 481 of the Consolidated Tax Act 1997. An individual can invest up to £25,000 (€31,743) for shares in a company producing a specified film. At least half the production cost must be incurred in the Republic and relief will only be allowed on the amount spent by the company in the Republic.
A taxpayer will get tax relief on 80 per cent of the investment at the marginal tax rate. On an investment of £25,000 the relief would be £9,200 (46 per cent of 80 per cent of £25,000). Relief comes in the form of an increase in the investor's tax-free allowance.
To get the relief the individual has to make the investment. Then the film fund promoter who has launched the production company in which he/she has invested will supply the investor with a form from the Revenue Commissioners confirming that the individual is entitled to an increased tax-free allowance. The investor then submits this form to the tax inspector who will either adjust the tax free allowance to take account of the investment or calculate the tax refund due to the investor. When production is completed the production company is liquidated and the investor gets his/her return out of the proceeds of the sale of the film.
A PAYE taxpayer on the top 46 per cent tax rate who invests the full £25,000 would have their annual tax allowance increased by £9,200 while self-employed investors can either get the relief as a deduction from their preliminary tax payment due on November 1st each year or as a credit against their final tax assessment.
The scheme is attractive to investors because it is a one-year investment and tax relief is available quickly. But investors should remember that returns cannot be guaranteed, so they could lose their investment if the film is a failure. When assessing an investment opportunity it is important to check if there is a distribution agreement in place. While returns cannot be guaranteed, risk is significantly reduced when the production company has been commissioned to produce the film and therefore has a sale or distribution agreement in place. This sort of arrangement reduces the risk largely to production failure.
In practice, investors appear to have done well so far out of the scheme. Returns have been about 15 to 20 per cent. This breaks down as follows: If £25,000 is invested, the net cost of the investment is £15,800 after allowing for the tax relief received of £9,200. Returns on that £15,800 investment in 1998 have been around £18,500, according to Noel Minogue marketing director of AIB Investment Managers, one of the biggest film fund promoters. Industry sources estimate that more than £50 million will be raised under the scheme this year to finance film production in the Republic. AIBIM has raised £24 million so far and plans to launch a new fund of about £4 million next week. At least one other new fund is expected to target investors in coming weeks. An investor can invest as little as £5,000, but the average investment is £16,000 to £17,000, according to Mr Minogue.
"Investors really need to be getting relief at the 46 per cent rate for the investment to make economic sense," he advised. But other than film finance, opportunities to reduce exposure to income tax by making equity or quasi-equity investments are now few and far between since successive budgets have cut the reliefs available, one tax adviser commented.
The 1998 budget cut the amount that any company could raise under a BES scheme from £1 million to £250,000. As a result many BES fund promoters left the market. They maintained it was not worth a company's while raising just £250,000 under a BES scheme when the expenses involved were taken into account and that the risk for investors had increased significantly because of the reduction in the size of investments allowed in each company. So while an individual taxpayer can still get relief at his/her top tax rate for up to £25,000 invested in a Revenue-approved BES scheme, taxpayers may have difficulty finding a scheme in which to invest. Some smaller companies - public and private - are raising BES funds. But because the funds are raised privately through business advisers many potential investors may never hear of a suitable opportunity.
Investing in property to shelter income from tax used to be a very popular option. But many of the reliefs have now been clawed back and property sources say there is a shortage of Section 23-type property.
Investment in a Section 23-type apartment, for example, gives the investor an allowance equal to about the construction cost. The allowance is spread over 10 years, giving an annual allowance. This can be set off against the rental income from that apartment and any excess can be set off against other rental income. It is important to note that the allowance can only reduce tax on rental income and not on any other personal income such as income from employment or investment income. Property is available which qualifies for Section 48 relief. Under this relief an investor who buys a house in an approved development in a designated seaside resort can get the Section 23 relief against rental income described above. A number of conditions must be met to qualify for the relief including that the house is rented out to tourists for specified periods.
Investors should be careful about the potential for capital appreciation. One property industry source maintained that many properties available under the Section 48 provision are poor quality and are being offered at very high prices.
And, under Section 48, an investment in a holiday cottage, guesthouse, hotel or other tourist facility will give the investor a capital allowance which can be offset against all rental income in the first instance over a seven- to 10-year period. Any excess annual allowance can be used to reduce all other income for tax purposes, subject to a limit of £25,000 per annum. There are a limited number of such investments available, according to property sources. More recent potential tax-based property investments include multi-storey car parks, student accommodation, child-care facilities and convalescent homes where generous capital allowances are available. And as the end of the tax year approaches taxpayers should not forget other ways of reducing their taxable income such as making additional voluntary contributions to their pension plans.
