This September saw the 30th Monaco Yacht Show (MYS), which many thought would not take place, despite Europe starting to emerge from the COVID-19 pandemic. However, with administrative heavy, but well organised, procedures in place, over 300 exhibitors attended the show – and it was excellent.
I love a glass of champagne, but as an adviser wanting to highlight the pitfalls of owning superyachts and the need for increased fiscal governance surrounding these complex assets, I have tended to lean towards business over pleasure at the MYS over the years. For 2021, almost bizarrely, this was very much the tone of the show, with almost no large gatherings or events and alas very little champagne. But there was still a real buzz in the air from professionals who had had one of the busiest years ever. Sales have increased by 52% (new yacht sales during Q1 and Q2 of 2020 compared to the same period in 2021) as a result of deferred 2020 transactions and no doubt a large number of transactions have been driven by the sentiment of ‘we only live once’.
This is wonderful. The superyacht industry, which to date has produced a total of 5,325 superyachts in operation around the globe, directly employs approximately 150,000 people worldwide. Growth figures are equally as impressive, with an expected annual growth rate from 2021 to 2028 of 5.2%.
The industry is also moving the sustainability dial, with a new generation of owners demanding sustainable yachts that match their values. With top speed now becoming less important, an increase in zero emission technology, such as batteries and fuel cells, has allowed ship designers and builders to engineer yachts to be cleaner and quieter than ever before. In fact there are now a number of fully electric vessels on the market, which can deliver the same luxurious experience combined with zero emissions and unlimited range due to solar power.
On the tax side of things, the landscape has changed considerably over the last five years. There is now a better understanding of the global pressures facing UHNWIs to meet the obligations arising from their international lives, and the need to make sure that taking a certain approach to tax in one area of their lives doesn’t have a detrimental impact in other areas. As a result, more yacht owners and their and advisers are asking – ‘why am I taking this approach and is it right for me?’.
With increased activity in the superyacht industry comes a responsibility for professionals to ensure owners bring yachts into their lives in a sound and sustainable way. This means making sure no issues will arise with the tax authorities, and more broadly, looking to the needs of the next generation of yacht owners within the families that we look after.
So, what is it that is quite so sensitive when it comes to tax and superyachts? At its core it is the fact that one is combining complex family lives with complex personal assets. The yachts move. The owners move. The yachts are often held in complex structures (for a variety of necessary reasons), and these need to fit into the wider complex lives of the owners. On this basis one needs to do two things:
• Stand back from both the yacht and the family in order to ensure that solutions are properly tailored to the specific set of facts
• Be educated and empowered enough to ask the right questions, in the right order, from the right people, to get the right advice
I am not a fan of extremely long tax reports covering every angle and nuance of a situation. But it is important to ensure that a project is considered broadly enough, and broken down enough, to enable the right tax questions to be asked of the right person, at the right stage of the project.
To take an example; for a yacht build it might be important to consider the prospect of owners’ supplies up front, so that the division between what the shipyard buys and what the owner buys for the yacht is included in the relevant contracts. If it is too early to get one’s head around this at the beginning of a long build, one should consider enabling the terms of the build contract to be added to later to take account of the tax sensitivity of these late-stage purchases.
Sticking with the topic of yacht builds; with these sometimes taking up to five years, the matter of tax residence of the owners or trust beneficiaries becomes important. For example, a move during the yacht build from the US to the UK, planned or otherwise, will significantly impact the tax profile of the yacht once it is delivered. This brings the two worlds of direct ‘individual’ taxes and indirect ‘yacht’ taxes into the same picture, and they must be considered together.
A similar point can be made for how the yacht is used. The VAT world treats private or commercial operation of a yacht as black and white. You are either in one or the other and must follow the tax rules of each. Families often don’t realise this and expect to be able to buy a yacht and rent it out if they feel like it in the future, in the same way that they would if they bought a property that they end up not using as much as they expected to. The rules are, however, totally different for yachts and property. Having said this, it is also important to note that there are now arrangements in the market which endeavour to facilitate the commercial use of a private yacht, and while these are increasingly popular, they do need reviewing carefully.
I advocate that families and family offices gain as much information as possible, from the right sources, so that they can make more informed decisions when bringing these wonderful but complex assets into their lives. Importantly, this should be done on an asset-by-asset basis to ensure you get the right advice.
For example, and to get slightly technical for a moment, let’s compare the movement of art and yachts. A family can transport a piece of art into the UK or EU (now that they are separate customs unions) without suffering customs or import VAT by availing themselves of the facilities of a ‘customs warehouse’ or ‘free port’. This is perfectly legitimate and is designed to facilitate the moment of items into a customs territory without a charge to tax if the owner isn’t going to be enjoying the art (as it will be sitting in a climate-controlled room in the dark). However, for the UK, using a customs warehouse may suspend customs and VAT, but it does not suspend the UK’s remittance basis of taxation for non-doms. This is a completely different set of tax legislation and so needs to be looked at separately. It also doesn’t suspend the application of UK inheritance tax rules for non doms, and this may be relevant to the items now sitting on UK soil.
The concept of using a customs warehouse for a yacht also exists, but this is often in relation to the build or maintenance of a yacht at a shipyard. There is also a tax relief called ‘temporary admission’ (which can be used for both yachts and art) that suspends VAT and Customs on an asset brought into the UK or EU temporarily. Straight forward as the relief may seem, it has some strict and sometimes nuanced rules that if breached could lead to tax becoming due on the whole value of the asset, which would be a material unexpected cost when you consider the values of the assets in question.
I would also note that the concept of a customs warehouse can not be stretched as far as the yacht itself. In other words, putting art on board a yacht flagged (registered) outside the UK or EU is not akin to it being ‘in’ the territory of the country in question. As such, art on board a Cayman flagged yacht moored off Nice is in French territorial waters, not Cayman waters, and the VAT rules relevant to the art (and yacht) are those of the EU. A client of mine was once confidently told otherwise by an art professional, which could have caused a costly mistake and highlights the need to take the right advice from the right person.
The event of Brexit and needing to consider two, rather than one, customs unions is being bedded down into the day to day lives of tax advisers, clients and other professionals moving luxury assets around. One technical point that Brexit has helpfully shone a light onto is what is meant by ‘VAT paid’, a concept somewhat limited in my experience to luxury assets. I was interested to see at this year’s Monaco Marine Money Forum an acceptance that the concept of being ‘VAT paid’ is not really a thing. Historically the Superyacht industry has focused on whether a yacht (or items onboard) are ‘VAT paid’ or ‘non-VAT paid’ as if this were a binary fixed concept. However, this missed the important point that paying VAT on an asset once in its lifetime does not mean it will never be paid again. Indeed, with the history of a yacht often being complex (for example, moving in and out of customs unions, changing ownership, switching between private and commercial use) the likelihood of a yacht ‘losing’ what is commonly referred to as a ‘VAT paid’ status is relatively high. This is especially the case as yachts become bigger, more advanced and capable of doing more things. The discussion in Monaco amongst experienced tax professionals around the complexity of a yacht’s VAT status was a signal to me that the governance applied to private wealth assets owned by our clients is indeed increasing, and with it, the fiscal sustainability of the Superyacht industry is improving.
To learn more about buying and owning a yacht or other luxury assets, please get in touch with Nic directly.
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