Private Jets in the Public Eye

Date: 29 Mar 2022

Silvia Ricciardi

Citywealth interviewed experts from the aviation sector to discuss the process from an initial interest in luxury aircraft to the concrete acquisition.

Citywealth interviewed experts from the aviation sector to discuss the process from an initial interest in luxury aircraft to the concrete acquisition, talking about the advantages and disadvantages of chartering instead of purchasing, going through different ownership models and tax treatment, analysing ambitions and goals of UHNW individuals.

Citywealth wants to thank Michael Nelson, Partner at Clyde & Co (Dubai), Simon Wong, Partner at Stephenson Harwood (Hong Kong), Peter Neenan, Partner at Stewarts (London) and Lisa Vanderheide, Tax Director at Stewarts (London).

Buying a luxury (new or used) aircraft

When it comes to private jets, it is fundamental to understand the whole process, from an initial interest to the concrete acquisition. Michael mentions that “if the purchaser is a first-time buyer, then a good deal of initial work needs to be done with an experienced business jet broker and business jet operator to identify the right aircraft for the buyer, considering issues such as operational requirements, price, range and size.” 

Dealing with both clients who want to opt for a new aircraft and buyers who prefer to pick a used one, Simon points out that “with some countries not doing well economically, it is possible that you find some good deals for used jets, so we have seen many such transactions in the last couple of years. On the other hand, we have also liaised with some purchasers who do not mind waiting a couple of years for a new jet to be ordered and manufactured, especially in the case of newly released models, such as Gulfstream G700 aircraft.”

Michael confirms that “the process for buying a business jet does vary depending on whether the buyer is buying new from a manufacturer or pre-owned, but the buyer and the seller would typically first enter into a letter of intent.” The letter of intent is the first step that leads to the acquisition of the private jet, followed by a binding sale and purchase agreement. Michael explains: “The letter of intent is usually non-binding and would cover the key commercial points of the deal – the deposit, the price, the inspection process for the business jet and the condition the business jet will be delivered in and where. Once the letter of intent has been signed and a deposit paid, then the buyer and the seller will enter into a more detailed sale and purchase agreement. The latter is the ‘roadmap’ for the transaction, setting out the various obligations for both the buyer and the seller in order to successfully close the transaction and deliver the business jet from the seller to the buyer.”

“Ordering a new aircraft from the manufacturer is a relatively straightforward process as far as legal documentation and technical matters are concerned,” says Simon, who adds that understanding the financial implications is key when ordering a brand-new jet. “The main thing you need to take into account is the financial commitment. Manufacturers will require instalment payments during the manufacturing process, which they call ‘PDPs’ (pre-delivery payments). Almost 90% of the purchase price needs to be paid in six instalments or so over two to three years prior to delivery of the aircraft. Given the high value of an aircraft, this is a substantial commitment. Fortunately, several business jet financiers provide PDP financing.”

If the buyer opts for a used jet, then a team of experts is quite essential to go through a smooth acquisition process. Simon suggests that “if you are acquiring a used jet, you will be well advised to have a team including a reputable broker, a professional aircraft manager, an experienced and specialised lawyer, an independent aircraft inspection facility, an escrow agent for the purchase money and, if you need financing, a financial institution active in the field to assist you and ensure that legal, tax, technical and financial matters are properly attended to in a hassle-free manner.  A lawyer experienced in business jet trading and financing will give you much less headache compared to just any corporate lawyer or even a lawyer who has experience in commercial aircraft but not in business jets, as there is too much industry knowledge and pitfalls involved.”  

With a brief analysis of the stages necessary to acquire a used business jet, Simon lists all the main steps, which include “sourcing an aircraft suitable for your needs through a broker, negotiating the LOI (letter of intent), negotiating the formal purchase agreement, inspecting the technical condition of the aircraft, rectifying any technical issues identified, choosing a jurisdiction to register the aircraft in, setting up the corporate and/or trust structure to hold the aircraft (and this has a lot to do with the choice of jurisdiction of aircraft registration), choosing a transfer tax neutral jurisdiction to deliver the aircraft at closing, attending to aircraft registration issues, setting up insurance arrangements, appointing a professional aircraft manager, hiring crew, firming up long-term parking and hangar arrangements, satisfying conditions precedent and attending to the closing process. If delivery financing is required, then there will be a financing transaction in parallel. To alleviate the execution burden, some buyers will pay with their own cash first and then refinance the aircraft after closing. In any event, there is a lot of work so professional guidance is critical.”     

Private jets: chartering vs purchasing

Before buying a luxury aircraft, purchasers can take into consideration different options available to be sure to select the most appropriate and affordable one according to their needs.

Michael reflects on the advantages and disadvantages of chartering a private jet, reminding us that “business jets are, of course, expensive to buy and equally so to maintain and operate. Whilst ad hoc chartering of business avoids the on-going costs of ownership of a business jet, it does not offer the same bespoke service, convenience and reliability of private ownership.” But he also adds other alternatives to the table: “There are several options that sit between ad hoc chartering and private ownership, such as fractional ownership and jet program membership and it is important that the buyer considers what is appropriate for its budget and needs.”

“When considering a purchase or charter of a luxury aircraft, often the most difficult scenario is the one ignored: what happens when things go wrong; – intervenes Peter, who comments on chartering an aircraft, dwelling upon all the necessary steps to reduce the risk of an accident – When considering chartering an aircraft it is critical that an individual or company fully risk assesses the operation before the charter. This becomes even more critical when the operation is abroad or has particular risk factors (i.e., remoteness, undeveloped regulatory regime, mountain flying, weather etc). Often this may require the instruction of an expert for a desktop report or even an audit. For repeated charters around the world, this can be a cumbersome and costly exercise, but it is a necessary expense to reduce the risk of an accident.”

In order to give the best advice, Simon focuses on how much the client is going to use the aircraft. “If you are flying less than one hundred hours per year, then you should just charter a jet when you need it as the cost of owning and keeping a business jet is high. If you fly around two hundred hours per year, then you can join a ‘card programme’, which is like joining a prepaid block hours programme. In Europe and the US, where business jet fleets are large enough, there are also aircraft fractional ownership programmes that allow you access to a jet anywhere anytime, in addition to giving you the benefit of depreciation allowances on the aircraft for income tax purposes. However, if you fly more than four hundred hours per year, then you should buy your own plane. That said, for those who can afford it, owning a jet is like owning a sports car, you do not necessarily drive it to work every morning but having it sitting in your garage is a joy itself.”

Considering the positive aspects of buying a private jet, Peter adds that “an advantage is that the operation of the aircraft is usually performed by a single assigned operator. As such, an owner can have greater control over the quality of that operation and can ensure that the operation has the funds and safety management system in place to dramatically reduce the risks of an accident.”

Protecting your crew and guarding your investment

Insurance to protect your crew is key when working on the contractual aspect of your aircraft. Peter points out that “as an owner of an aircraft with a crew assigned, the owner has choice of the home jurisdiction for that crew (usually the owner’s home base), and/or may include specific provisions governing jurisdiction and applicable law in the event that there is an accident or dispute. Owners can and should ensure that the aircraft is well insured with significant passenger liability insurance to protect them or their family in the event of an accident. When chartering, these contractual aspects can be easily overlooked. I have experienced multiple clients who have chartered aircraft only to discover after an accident that the insurance policy is extremely limited and insufficient to cover their claims. Additionally, a spate of recent decisions has highlighted the risk of being unable to establish a passenger’s home jurisdiction and applicable law against a foreign charter operator. Without scheduled routes (as is the case for all charter operators), it is difficult to establish the requirements under international conventions which were drafted with scheduled operations in mind. Likewise, recent court decisions have identified that even if a claim can be brought in a passenger’s home court (or their court of preference), applicable law clauses in contracts will govern. Every jurisdiction in the world assesses loss in a different way and an applicable law clause can have a dramatic impact on the compensation available to a passenger or their family.”

It is equally crucial to seek tax advice from aviation experts who can guide throughout the whole acquisition process and can correctly address possible issues which could arise when changes to the ownership structure are involved. “The use and/or ownership of private jets, like any valuable asset, will always be of interest to HMRC. It is of course an automatic red flag to indicate wealth, the source and use of which are mainstays in HMRC’s compliance activities,” says Lisa, who adds that “it therefore goes without saying, that appropriate tax advice should always be sought, particularly when jets are bought and sold, or there are anticipated changes to the ownership structure. There may be particular issues when people live across various borders and rely on day counts to avoid UK tax residence. HMRC make use of a wide range of information sources as part of their compliance activities, the breadth of depth of which should not be underestimated. HMRC can and do access airport and customs data on aircraft and passengers for all the main and regional airports. Similarly, HMRC will seek to use their information power to determine beneficial ownership of a private jet if they suspect there is a connection to a UK tax resident individual or other entity.”

Why are UHNW individuals interested in private jets?

Michael thinks that “buyers of business jets are generally motivated by the convenience that a business jet brings – the ability to reach destinations efficiently and quickly without the delays encountered by commercial aviation. Owners wish to arrive at their destinations as ‘ready’ as possible (so, for example, a private jet gives you the possibility to sleep and then freshen up), plus the need to stay connected is paramount, so fast and reliable Wi-Fi is often among the chief requirements.”

“People in Europe and North America may be more rational in choosing an aircraft which matches their needs,” says Simon, who adds that “in Asia, people definitely like the bigger, more luxurious models with longer flight ranges.”

If your aim is to get a luxury aircraft, remember to seek professional advice whether you want to purchase or charter a new or used private jet, making sure to gather accurate information on insurance and tax treatment… then you can spend time coming up with bespoke requests about interior and exterior options knowing that aviation experts got all the crucial aspects covered.

Have a look at Citywealth’s YouTube series Unlocking the Secrets of a Luxury Lifestyle: Behind the Scenes with a Private Jet Lawyer