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Leasing
Overview
22 October 2020
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While the lender retains so much security, it also retains liability as registered owner, so it’s perhaps not surprising that pure leasing isn’t more popular. It does form the basis of various VAT-reduction and deferment schemes. Such schemes come and go, and are not covered here. Feel to contact us regarding tax avoidance.
minutes
2
Reading time
22 October 2020
Last revised
While the lender retains so much security, it also retains liability as registered owner, so it’s perhaps not surprising that pure leasing isn’t more popular. It does form the basis of various VAT-reduction and deferment schemes. Such schemes come and go, and are not covered here. Feel to contact us regarding tax avoidance.
The arrangement involves a bank or leasing company (lessor) buying a yacht and becoming its legal owner.
The lessor then bareboat charters the yacht to the lessee (owner) for an agreed period of time.
The lessee pays instalments equivalent to the full value of the yacht plus a return on capital instead of interest on a loan.
The lessee is considered the regulatory owner of the yacht.
The lessee has exclusive possession and control of the yacht and must keep it in good working order.
Insurance against loss or damage is the lessee's responsibility.
The lessee is entitled to the warranties provided by the yard.
The lessor is indemnified against liabilities related to being the registered owner.
The lessee cannot sell the yacht as they do not own it.
To terminate the lease, the lessee must pay the remaining instalments or a cancellation fee.
The lessee has exclusive possession and control of the yacht and must keep it in good working order.
Insurance against loss or damage is the lessee's responsibility.
The lessee is entitled to the warranties provided by the yard.
The lessor is indemnified against liabilities related to being the registered owner.
The lessee cannot sell the yacht as they do not own it.
To terminate the lease, the lessee must pay the remaining instalments or a cancellation fee.
The arrangement involves a bank or leasing company (lessor) buying a yacht and becoming its legal owner.
The lessor then bareboat charters the yacht to the lessee (owner) for an agreed period of time.
The lessee pays instalments equivalent to the full value of the yacht plus a return on capital instead of interest on a loan.
The lessee is considered the regulatory owner of the yacht.
The bank or leasing company (known as the ‘lessor’) buys the yacht and is the legal, registered owner. Then the lessor, in effect, bareboat charters (so, without crew) it to the ‘owner’ (known as the ‘lessee’), over an agreed period of time. The lessee pays instalments equivalent to the full value of the asset over the term of the lease plus a return on capital to the lender, instead of interest on a loan. At the end of the lease, after the final payment has been made, the asset may be transferred to the lessee.
FEATURES
Typically, the lessee:
Is the ‘owner’ of the yacht for regulatory purposes;
Has exclusive possession and control of the yacht;
Will be obliged to keep the yacht in good working order;
Must insure the yacht against loss or damage;
Will be entitled to the yard’s warranties;
Must indemnify the lessor against liabilities stemming from the lessor being the registered owner;
Cannot sell the yacht as it does not own it; and
Must pay the remaining instalments, or a cancellation fee, to terminate the lease agreement.
OTHER FORMS
The Statement of Standard Accounting Practice SSAP 21 (Accounting for leases and hire purchase contracts) defines a finance lease as a lease which transfers ‘substantially all of the risks and rewards of ownership of the asset to the lessee’. The distinction is drawn with operating leases, common for aircraft, plant and equipment, where the risk in relation to the asset falls on the lessor rather than the lessee. An operating lease will be treated as being off balance sheet in the lessee’s accounts, and at the expiry of the lease term, the lessee is obliged to return the asset to the lessor and the asset’s residual value is of no concern to the lessee.
Only relevant to smaller yachts and tenders, SSAP 21 also distinguishes a hire purchase contract, which allows the hirer to acquire legal title by exercising an option to purchase the asset – normally having paid an agreed number of instalments. SSAP 21 prescribes the accounting treatments, but note that accounting standards are being developed which will supersede SSAP 21.
Thank you to all our Members who contributed to this article. Unless otherwise stated, this article broadly describes, by way of illustration, the situation in the United Kingdom waters in respect of United Kingdom-registered vessels. This piece does not provide or replace legal advice.
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