The aspiring yacht owner – Tips to avoid pitfalls

Yacht Ownership

In an ideal world, the aspiring yacht owner would walk down to his nearest marina, hand over his cash and take possession of his shiny new vessel. Cruising the waves as much or as little as he liked with little additional costs. 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 sailboat, 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. Buying a yacht of any type or size is a major acquisition, and just like the purchase of any other major asset, should be well thought through and planned out to avoid a number of potentially expensive pitfalls.

Financing

Perhaps the first question to answer is how to pay for your yacht in the first place. The first decision to be taken 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. Yacht mortgages come in various flavours to suit an individual’s particular needs. As with a house, a plain 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. Here 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 could lie in using a trust, 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 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. Revenue from chartering could substantially pay off the yacht costs within two to three years on this model. As a result, the owner would achieve 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.

It is also 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.

Insurance

You will also be required to have insurance in place before the loan 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.

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.

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 the 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.

When you eventually sell your yacht,  costs associated such as VAT payable depends upon where the sale is executed.

Corporate Ownership

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.  The owner (settlor) would transfer the asset to the effective ownership of a trustee, who then manages it for the benefit of the beneficiary.

Fractional Ownership

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 can mitigate some of these cost factors by effectively dividing the costs of ownership among a limited group of people, each of whom owns 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 by yacht 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.

Chartering

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.

Leasing

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.

In Summary

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 that 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.

 

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