Howard Callow is general manager of private client service at Bank of Bermuda, Isle of Man. (Reprinted from Private Wealth Management 2004.)
Buying a superyacht means buying a lifestyle. It is the ultimate luxury purchase but it need not be a tax burden – provided that you take good professional advice
The definition of a luxury yacht varies widely and requires clarification when considering exactly which type of vessel to purchase. The industry has a category of 'mega' or superyachts, which are predominantly motor powered with an overall length exceeding 25 metres and can cost well over $100 million. That sort of price tag gives the freedom of the world's seas whether entertaining for business purposes, hosting employee meetings or indulging in personal luxury.
When considering the purchase of a superyacht, the two main areas of concern for clients are ensuring that an effective ownership structure, which meets individual needs, is in place, and tax efficiency – particularly in relation to value added tax or sales tax.
Yachts are basically a luxury purchase – whether bought for business purposes or simply pleasure. They are considered a cost rather than an investment and, as such, are liable to VAT and sales tax, which can be a very expensive cost in Europe. As with any major expenditure, specialist advice is always highly valuable and can help avoid common pitfalls in purchasing.
Buying privately is the most desirable route to owning a yacht but it is also the most expensive. Some ownership structures might involve a family trust as well as an offshore holding company – the purchase will form part of an asset class within the existing trust.
Alternatively, combining a family trust with the structuring of offshore life insurance could provide an added layer of tax protection as the yacht would ultimately be owned by the life policy and not the beneficiaries or trustees.
Clients who own their own company, could also consider purchasing a yacht through an Employee Benefit Trust (EBT). Provided that the yacht was subject to the same rules as other assets held in an EBT, such as being ordinarily available to all employees, it could be an appropriate way of purchasing a superyacht, which clients could lease from the EBT.
Owning a yacht through an offshore company has been the most commonly used structure in the past. However, changes in regulation are pushing clients to seek additional ways of structuring purchases. Specialist yacht companies can offer professional advice on the ownership structures most suited to clients' requirements and circumstances, and can also provide assistance with VAT and sales tax issues.
Sales tax minefield
Sales or value added taxes have been a potential minefield for yacht owners since the EU passed measures 10 years ago requiring all new yachts, and used yachts up to eight years old, used by EU residents to be VAT paid.
For older yachts, in particular, proof of tax-paid status can sometimes be difficult to furnish, particularly when some countries (and even different regions within the same country) can make different interpretations of the same rules. Declarations deemed fraudulent may be reviewed long after the event, and yachts can be, and have been, seized by authorities.
But there are lawful ways of mitigating sales tax charges. Vessels that are owned and chartered as a business asset are entitled to recovery of VAT if the owner is VAT registered. As an example, potential yacht owners could consider incorporating a company in the Isle of Man, using a responsible institution, which provides a full range of services from directors to company secretarial services. Companies registered in the Isle of Man and chartering a yacht can obtain full VAT registration and yet still take advantage of a zero rate of tax on the profits generated through their commercial chartering activity.
Because registration is essentially a client's passport to roam international waters, it is an area that needs to be carefully considered and dealt with well in advance of delivery and ownership.
Registering your yacht under the British flag, or Red Ensign, is considered a mark of high quality and proof of the adherence to international maritime laws. It is the equivalent of having an European passport. US clients registering yachts in the Cayman Islands also get a Red Ensign. In Asia, many yachts register with the British flag, although 'flagging' does not appear to be as important in Asia as it is in Europe or the Americas. This is largely due to the relatively small size of the yachting industry currently though this could change in a few years time.
Clients also need to take into account varying insurance requirements when buying and registering yachts. These differ between jurisdictions and could affect the choice of where to register.
Buying and registering yachts in different jurisdictions involves different regulations. For example, Guernsey requires the disclosure of the ultimate beneficial owner while other jurisdictions, such as the British Virgin Islands, do not. But convenience, in terms of accessing the required financial advice when purchasing and registering a yacht, tends to be the main consideration, so US clients will tend to register in the Cayman Islands rather than an European jurisdiction.
Buying a lifestyle
Following consideration of the initial purchase cost, clients need to be aware of ongoing maintenance costs of super yachts.
While purchasing – rather than renting – moorings is possible in some locations (and can prove a shrewd investment), maintaining a yacht can cost between 8-10% of the value of the yacht per year.
Chartering may help offset costs and can be extremely lucrative at up to $500,000 per week. However, few owners of this type of yacht charter, except on an occasional short-term basis.
For many clients, buying a yacht is buying a lifestyle. It is the ultimate luxury purchase and when you have a slice of that luxury it is simply too glorious to want to share.