Publication - Private Wealth Advisor

Date - December/January 2000/01

Section - Luxury assets

 

'You can tell the men from the boys by the size of their toys' so the well-worn saying goes. As dot.com and mobile communications millionaires are disgorged into this strangely perverted value system of modern day success, their wish list almost invariably include a large expensive floating asset - the yacht.

 

Richard J Bach, Managing Director of Safehaven International, explains how the colour of the flag can influence the management of the investment.

 

There are some1900 luxury yachts of over 100 feet length navigating around the globe today and according to 'ShowBoats International', almost ten miles of these toys, worth in the region of US$4billion, are currently under construction. Although this 'super-yacht' category represents approximately 2% of all yachts owned worldwide, the astonishing fact is that there has been a 30% increase in yacht building in the last 12 months.

 

The instant acquisition of a new vessel super-yacht is a thing of the past. Brokerage vessels fetch their asking prices and slots of deliveries of new super-yachts are being quoted into the mid-2000s. The brief for larger and larger, more sophisticated, toys have become almost common place.

 

But how does this messing around in boats affect the advice of the private wealth advisor to the client? What pertinent advice can he offer?

 

A yacht will represent the most - or nearly the most - expensive, and in most cases, valuable, asset in a client's portfolio. They are expensive to acquire, to run and to maintain. They will often require both a captain and a crew on hand. They will be subject to marine and other perils. One well known yacht is reputed to cost her owner US$100,000 a day to run. To budget approximately 8-10% of the value of the yacht per annum is a prudent and realistic approach to its upkeep, moorings, insurance and other related expenses.

 

 

Flagging the asset is just one of the considerations when purchasing a luxury yacht - but a highly important one. For all practical purposes, international conventions and state municipal laws require that all seagoing vessels visiting or departing from their territorial waters be fully registered. The form, content and qualification for eligibility for the state registers are considerably varied and, despite lobbying by interested parties, lack homogeneity and, in some cases, credibility in terms of their requirements for registry and probity of the information recorded.

 

Flags of convenience have long been used, and much maligned, in the commercial merchant shipping context. The same cannot be said of the use of 'foreign' flags for yachts. With the exception of occasional flights of fancy into exotic flags - which afford as much privacy and protection from unwelcome harassment from bored customs officials as erecting a fully lit Christmas tree with a fairy on top adorning the transom - the red British ensign is a highly respected and time-honoured choice for 'flagging out'. The British Register affords security of registration in providing the root of the title documentation, a means of registering liens and mortgages, and is backed by British marine law and traditions. Additionally, British Registration affords the user recourse to British embassies and consuls throughout the world.

 

Companies incorporated in British territories are eligible for the use of the red ensign both in their domestic territory and in other red ensign states. If a vessel exceeds twenty-four metres in length a 'representative person', which can include a corporate body, will be required in the event that the registering party has no place of establishment in the territory of registration. Consequently, the use of companies registered in the international finance centres can be linked to yacht ownership to provide financially attractive and efficient means of ownership. By keeping the yacht owning company apart from other assets, a sound method of ownership and potential future transfer is established at relatively low cost and the minimisation of risk.

 

It is important to note that with benefits comes responsibilities. In recent years the Maritime and Coastguard Agency (MCA) in the United Kingdom has implemented a Code of Practice for commercially operated pleasure craft. The rules relate to the construction and safety equipment installed upon red ensign registered yachts that, until the Code, had been subject of remarkably little regulation.

Manning regulations also apply to the larger privately operated pleasure vessels and are also clearly set out in the Code.

 

The recent trend towards purchasing larger vessels is being accompanied by another towards qualifies captains and crew and minimum safety standards in respect of British safety vessels. Other registries are closely watching these trends. In a slightly overzealous knee-jerk reaction recently, the Bahamian registry announced that vessels of over seventy-nine feet would not be afforded renewal of registration in the year 2001 unless the vessel satisfied the UK Code of Practice.

 

The enforcement of such regulations is more than likely to be by the port state authorities in the main, and by insurers who will view dimly any attempts to evade or circumvent compliance by the assured. It has to be noted that those regulations that are in force and are being introduced in general are applying the Safety of Life at Sea (SOLAS) conventions and are, for this reason, laudable. Of course, there are some bureaucratic absurdities, but the authorities are making genuine attempts to iron these out.

 

The choice of flag has also been associated with the liability of paying value-added taxes (VAT). There are still some dangerous misconceptions on this subject.  The choice of flag or port of registry alone does not avoid liability. VAT in the European Union is a use of tax and is not avoided purely on the basis that the owner of the yacht is not resident or incorporated in the European Union.

 

 

The residence of the principle user is also highly material to liability. If the principal user is resident outside the EU and the owner (if not the same) is also situated or resident outside the EU, the concession of Temporary Importation (TI) is available. But only under the circumstances that the vessel is used privately and not for more than six months, in the aggregate, in any 12-month period. We are informed that the TI period may soon be changed to a full two-year concession with a short departure period to reactivate a further two years. This should deal with the difficulties and anomalies caused by the current TI rules.

 

 

The commercial ownership of the yacht will also afford an ability to recover and defer the VAT on the acquisition cost. Yachts that are chartered, either bareboat (without a crew etc.) by demise or with a crew in the form of a service charter may recover the VAT on the basis that they are the tools of the trade. Luxembourg has established a commercial yacht register for this purpose. Other programmes involving British Registration demise charter to one user.

 

Whatever scheme is used it is important to remember the basic elements of commercial use and arms-length transactions, and to look at the security, the bureaucracy and the efficacy of the venture chosen. VAT will still have to be paid on the charter fee either in the place ( or places) where the service is rendered in the case of a skippered charter; or the place of the registration of the owner in the case of the hire of a means of transportation – the demise charter arrangement.

 

 

The red ensign ports are the UK mainland (London, Southampton, Plymouth and so on), the British Islands (Guernsey, Jersey and the Isle of Man), the Cayman Islands, British Virgin Islands, Bermuda and Turks and Caicos, all of these are available for use by any British citizen or corporation.