Financial buoyancy aids for yacht owners
Sponsored by Vistra
13 December, 2012
St Helier, Jersey
In an ideal world, the aspiring yacht owner would walk down to his nearest marina, hand over his cash, take possession of his shiny new vessel, and cruise the ocean waves as much or as little as he liked with little additional cost. Unfortunately, when it comes to purchasing and owning a yacht, life is not so simple!
Yachts come in various shapes and sizes, from a 30ft sail boat with compact family living quarters up to extensive luxury motor vessels capable of accommodating and entertaining large groups of people for long periods at sea. Obviously, the latter category will come with a considerably higher price tag and ongoing running costs. The reality is however, that buying a yacht of any type is a major acquisition, and, just like the purchase of any other major asset, must be well thought through and planned out to avoid a number of potentially expensive pitfalls.
Perhaps the first question to answer is how to pay for your yacht in the first place. The first decision you should take is whether you wish to buy your vessel outright or whether a structured funding solution could bring substantial additional benefits. Loans are widely available from banks, many of which now have dedicated marine finance teams or from a specialist marine finance company. Structured solutions can be arranged via trust companies and special purpose vehicles, which tend to be the domain of fiduciary and corporate services specialists
One of the most common ways of financing a yacht purchase is by taking out a mortgage on the vessel, and, just as with purchasing real estate through this method, yacht mortgages come in various flavours to suit an individual's particular needs. As with a house, a plain vanilla repayment mortgage would enable the buyer to pay off the principal and the interest at the same time over a defined period. The disadvantage of course is that interest rates can rise as well as fall, so that there is no certainty as to what future monthly repayments may be. However, some lenders offer time-limited interest-only yacht mortgages, under which payments will cover the cost of interest for a certain period - for example 12 months - with the facility then reverting to capital and interest repayments for the remaining term.
A more creative solution, though, could lie in the structuring route. By using a trust to control a company which owns the yacht, the asset can be made to work through a chartering programme, for example. A special purpose vehicle will be established to hold a deposit of e.g. '1 million for the yacht which is held as a security against future loan repayments. These funds can be held on deposit and so will grow with interest. At the same time, revenues from chartering feed into the ownership company which then funds the purchase of the yacht. Depending upon the size of the yacht, if it is valued at '10 million, weekly chartering fees of '100,000 could be achievable. Revenue from chartering could substantially pay off the yacht costs within a two to three year horizon on this model, so for an initial outlay of '1 million, the owner has achieved a far more effective and profitable outcome.
It is also important to ensure that all the appropriate legal requirements are followed once you have made an offer. Rules vary from country to country of course, but, in the UK for instance, the buyer must sign a sale contract, which will differ depending on whether the boat is being bought brand-new from a manufacturer or agent, or second-hand, either directly or through a brokerage. It is important to make clear within this contract that the vessel will be sold subject to finance approval, and if the boat is second-hand, subject to a satisfactory survey and valuation.
You will also be required to have insurance in place before the mortgage can be approved and issued. Just like insuring against any other risk, marine insurance policies come in many shapes and sizes depending on the level of cover required, and evidently this will be reflected in the level of the premium. It is important to be aware of the jurisdictional coverage of the insurance policy; for example, if you have bought a yacht in the UK, you may find that many insurers will not insure boats that are based outside European Union waters. Other exclusions to look out for are age requirements; insurers may not be willing to insure a vessel that is over a certain age, say 20 years. How you intend to use the boat will also have a bearing on the sort of insurance policy you are able to buy. Some companies will not insure against commercial risks, so it is vitally important to be aware of this if you intend to use your yacht for income-generating purposes.
Running Costs and Other Considerations
Overall running costs are likely to equate to around 10% of the value of the vessel each year. There will be a range of costs to consider, the most obvious of which are maintenance and repair costs. You will also have to pay an initial and ongoing annual fee to have your vessel registered in the jurisdiction of your choice. Fees may vary depending on the vessel's size and its intended use (whether it will be used for leisure or commercial purposes for example). Fees also vary from jurisdiction to jurisdiction, although these days tend to be broadly similar; expect to pay fees in the region of USD200 to USD400. Furthermore, there may be significant other costs to bear depending on the size of your vessel and how you intend to use it. The chances are that the larger the vessel, the less likely it is that you will be sailing it yourself, so you will need to hire a skipper. The more substantial and luxurious motorised yachts might also require a crew, so this brings employment law and employee rights into the equation, as well as extra costs.
The ongoing responsibilities of owning a yacht are, then, manifold, and could overwhelm even the most diligent yacht owner, particularly if the vessel is moored in one jurisdiction and registered in another. At this point, it is worth considering contracting the services of a yacht management company, or a corporate service provider specialising in marine services. These companies are present in most of the popular yachting locations as well as in jurisdictions with yacht registries. They will assume many of these responsibilities, such as completing the necessary paperwork to register your vessel, ensuring that is maintained, and taking over the hiring and paying of crew. Using a management company also allows yacht owners to utilize alternative ownership structures which may mitigate the initial and ongoing costs associated with buying and running a yacht, some of which are described next.
Where you eventually sell your yacht can also have costs associated, in particular VAT may be payable, depending upon where any sale is executed.
While it is perfectly possible in most cases to register a yacht in one's own name as an individual, there are many disadvantages to doing so; indeed, it is certainly the case that the vast majority of owners choose to transfer their ownership to some form of corporate entity or special purpose vehicle. For example, by using an offshore company to own, run or charter a yacht, it may be possible to take advantage of low rates of corporate tax and reduced rates of VAT on offer in certain jurisdictions. Furthermore, using a company form has certain other benefits in terms of protecting the owner; confidentiality being one of them, and limiting the liabilities that may arise in connection with ownership of the vessel being another. If confidentiality is a high priority for the owner, an additional option is the use of a trust company, into which the owner (settlor) transfers an asset to the effective ownership of a trustee who manages it for the benefit of a beneficiary. In civil law jurisdictions (and now some common law jurisdictions), a foundation will perform a similar role.
One of the major pitfalls of ownership is that yachts are a depreciating asset which might only be used a few weeks of the year by their owners. Fractional ownership, which was pioneered some 30 years ago in the private jet industry, can mitigate some of these cost factors by effectively dividing the costs of ownership among a limited group of people, each of whom own a 'fraction' of the yacht. Fractional ownership entitles you to use the vessel for a set amount of time each year, and fractional schemes are usually run through management companies. In return for a fee, the management company will take on the day-to-day responsibilities of maintaining the yacht as described above. The disadvantage is that the yacht cannot be said to be truly 'yours', and you might not be able to use it when you want.
Another way to offset the costs of yacht ownership is to charter your boat to other users, usually through a yacht management or charter company. This enables you to earn income from your yacht while you are not using it by renting it out to others for certain periods of time. How much income you ultimately earn from chartering your yacht will depend on the type of agreement you have with the chartering company. Under some agreements, the income is split equally between the yacht owner and the charter firm. However the owner typically still pays ongoing running costs. Alternatively, it is possible to agree to receive a guaranteed income every month, regardless of how often your boat is chartered out. This reduces risk, but owners may be restricted to a certain number of weeks each year when they can use their boat. And while chartering may be an attractive way to defray the costs associated with yacht ownership, there could well be tax implications in your country of residence on the income you receive.
By using a leasing arrangement, the bank or finance company buys the yacht from the seller and then leases it to the buyer. With this type of financing deal, the buyer does not actually legally own the asset but is instead granted possessory interest. The advantage, though, of using this type of arrangement is that one is not locked-in to ownership, and is able to walk away at the end of the lease term without having to worry about maintenance or selling on a depreciating asset. On the downside, monthly lease payments tend to be higher to take account of depreciation, and the lease owner has to front the risks associated with owning and operating a yacht such as liability for loss in the event of damage.
While buying a yacht may appear on the surface to be a simple transaction, there are in fact many things to take into consideration before taking the plunge. Which route to ownership is ultimately taken will of course depend heavily on a person's circumstances, such as their own financial standing, where they live, and how they intend to use their boat, among other things. Thankfully, there is a growing community of professionals in this field which can steer yacht owners onto the right course and take much of the hassle out of the ownership experience.
Guy Stephenson/Jennifer Duffy
020 8333 9125
About Vistra Group
Vistra is a leading independent provider of trust, fiduciary, corporate and fund services delivering personal and tailored solutions to international corporations, institutional investors and high net worth individuals from around the world.
Our clients can benefit from a multi-jurisdictional and personal approach, delivered by a team of professionals with an in-depth understanding of the often complex needs of every client. Our services include company formation and management, fund formation and administration, trustee services, family office, marine and aviation and accounting services.
Today Vistra employs around 350 employees in 23 offices covering 19 jurisdictions, with each of our offices providing the full range of fund, trust, corporate and estate planning solutions.
Vistra is a unique player in the trust and fiduciary industry, boasting the most balanced geographic reach globally while always guaranteeing the personal and tailored service that our clients deserve.
Together, we bring to life the Vistra ethos of 'Crossing Borders, Creating Solutions'.
Vistra is part of the OV Group, which includes Offshore Incorporations (OIL), Asia's leading company formation specialist and Vistra. The OV Group employs circa 500 professionals and is the 3rd biggest provider worldwide of trust and corporate services.
Vistra (Jersey) Limited and its affiliated companies are regulated by the Jersey Financial Services
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