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Investment in career of young sporting talent

Share of future earnings - how is any return taxed or loss relieved?

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I have been asked to comment on an investment proposition I have not come across before.

A young sporting talent needs considerable funding to continue his career.  If the young person does make it at the very top of their sport the earnings potential is extremely lucrative.

My UK based client has the opportunity to invest in return for a percentage of future gross earnings from the sporting activity.

The investment does not buy any asset such as shares; merely a right to a share of future earnings.

If the career does not take off can my client claim a loss for tax purposes?  If anything it feels like a negligible value claim for CGT may be in point.  Thoughts please?

If the career does take off and my client does start receiving annual “royalty“ type payments over a ten year period how are they taxed in the UK?   Ain income or capital gains?

I wonder if anyone has come across this scenario before and would appreciate contributor’s thoughts.

The investment would be in Euros directly to a bank account in the name of the sporting talent who is a national of, and resident, in another European country.

Thanks in anticipation.

Replies (15)

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By WhichTyler
17th Feb 2020 10:42

You are (or someone is) going to have to look at the contracts very carefully to determine this, I would think. Would you like to post them here so we can make informed comment?

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Hallerud at Easter
By DJKL
17th Feb 2020 10:45

What exact financial instrument is being purchased?

Would certainly not be one for me, films,acting, sport all being on my investments to avoid list- I have, after all, seen "The Producers", Leo being one of the few accountants portrayed on film.

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By bernard michael
17th Feb 2020 10:53

Sounds a very strange idea ( I nearly said daft) with lots of pitfalls
How much money is involved?
How is the money to be paid? - monthly as a lump sum with or without tax being deducted or a large lump annually
Is any equipment to be bought and if so in who's name
What happens if the target is injured either temporarily or permanently or gets bored and doesn't want to perform?
Which jurisdiction will the contracts be in ??
How much will the commitment be ?
I suggest you tell the client it's a legal matter and keep out of it- disaster beckons

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Replying to bernard michael:
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By Tax Dragon
17th Feb 2020 11:05

bernard michael wrote:

I suggest you tell the client it's a legal matter and keep out of it

But the OP is asked to comment on the tax, not asked to provide either investment or legal advice.

OP, it wouldn't surprise me if this was lose-lose for tax - no relief for a loss and maximum tax if a profit. At the least, I'm not seeing any loss allowable for income tax. You'd need to see the documents to determine whether a CGT loss might exist. (Who is advising on the tax overseas?)

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Replying to Tax Dragon:
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By aidan.costello
17th Feb 2020 11:33

Thank you TD (and other respondents). I think you are where I am.

If the client proceeds he is going in with his eyes wide open and knows

1 he could lose the lot,
2 will have to pay tax on the income/return on investment if it ever happens and
3 the best he can get on a loss is likely to be a loss for CGT purposes (which is only useful if there is a gain to use it against).

Other comments still appreciated.

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Replying to aidan.costello:
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By WhichTyler
17th Feb 2020 12:39

Is this a business investment or a personal one? Does your client get promotional benefits? (see the discussion of Crown & Cushion Hotel case that came up here recently)

sometimes similar investments are treated as loan-like, so initial returns recoup the initial 'investment' then additional income is taxable.

I guess this is a one-off by your client? Record companies are able to treat advances as trading expenses because that is the business they are in.

sports and rights income usually have an off-shore element? Are you ready for that?

On a practical level, is your client ever going to be able to assert their rights to future income? And prove that what they should be getting a %age of?

I'd get some specialist support (onward charge to the client) and learn from it if I were you...

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Replying to WhichTyler:
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By aidan.costello
17th Feb 2020 13:29

Thank you WT

Your comments are all sensible.

It is a personal investment.
It is a one-off that came up only though knowing the family.
There is a UK trading company that could make the investment but allowing the marketing/sponsorship expenses would be hard to justify on the UK based trading business.
They may want to retire and sell or close the UK business before this agreement ends and not want it in the company for that reason anyway.
Your advice regarding the legal strength of the agreement has been pointed out already and I will reinforce that..

I cannot put the agreement or more detail due to confidentiality but these comments are all extremely useful and greatly appreciated.

Thank you

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Replying to WhichTyler:
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By Tax Dragon
17th Feb 2020 15:11

WhichTyler wrote:

sometimes similar investments are treated as loan-like, so initial returns recoup the initial 'investment' then additional income is taxable.

And sometimes tax rules ignore the way you might 'like' to treat it. (Don't forget the money is going overseas.)

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Replying to Tax Dragon:
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By WhichTyler
18th Feb 2020 09:00

Very true. And as I said at the outset, we don't really know the detail of the deal, so this is highly caveated..

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By Accountant A
17th Feb 2020 21:01
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Replying to Accountant A:
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By aidan.costello
18th Feb 2020 08:32

Thank you AA. Very helpful and much appreciated.

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ALISK
By atleastisoundknowledgable...
18th Feb 2020 09:06

It’s not a (then) young (Spanish?) racing driver who appeared in Dragon’s Den a few years ago, is it.?

You don’t have to answer that ...

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Replying to atleastisoundknowledgable...:
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By aidan.costello
18th Feb 2020 10:34

Sounds interesting though! I googled it but couldn't find it.

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Replying to aidan.costello:
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By Tax Dragon
18th Feb 2020 10:59

Other search engines are available.

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By marcia.bowers
21st Feb 2020 11:25

For racehorse owners, I believe the costs incurred for training fees etc are not tax deductible but winnings are not taxed either. Obviously for most owners, winnings do not cover outgoings. I appreciate people cannot be "owned" but any similarity?

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