The world is shrinking. In 1919 it took the Smith brothers 28 days to fly from the UK to Australia, since the launch of the non-stop flight between Heathrow and Perth it now takes a mere 17 hours. As far flung places of the globe become ever more accessible, decreased travel times are making it easier for individuals and families to have beautiful houses in a number of different countries. With distance nearly conquered, the challenge of travel itself has changed. The emphasis is no longer quite so much on the speed of the journey, but on the experience of the journey itself, and people are now travelling across borders in style and easily moving their collections from one residence to another.

Complex tax implications arise when people live across borders and to those individuals who enjoy this lifestyle and the Family Offices who advise them, hearing that careful consideration needs to be applied to tax structuring when buying, holding and selling luxury assets will not be a surprise. Once an asset has been purchased and a structure established that works for the holding of the asset, such structures are often not reviewed until a change in the circumstance of the owner makes it necessary.

However, in our geopolitically connected world, changes taking place in one country can cause a ripple effect and a whole host of new considerations for a wealthy individual or Family Office. Nowhere is this clearer at the moment than Brexit.

Brexit and luxury assets

It is important to note that it's premature to predict Brexit-induced turbulence for owners of private jets or “chop in the Channel” for yacht enthusiasts. At the moment, the post-Brexit landscape is unclear, from the fundamental question of whether the UK will actually leave the European Union to questions on the form of any exit - soft, hard, with a deal, or without a deal, the options seem endless.

With the future looking hazy, it can be difficult for people to know how to prepare for it. However, whilst negotiations go on between London and Brussels, there are a number of things that individuals and Family Offices can do to put themselves in the best position with regards to their luxury assets. As they say, knowledge is power and at least by understanding what the different scenarios may mean, decisive action can be taken swiftly when that future is revealed.

As ever, the impacts of potential changes in taxation will vary greatly depending on the unique circumstances of the owner and the asset. Citizenship of the owner, purpose and pattern of the asset's use, the asset's location and where it is registered will all play some part in the outcome.

It's therefore essential that assets are considered on a case by case basis and that professional advice is obtained where necessary.
One area we have been increasingly talking to KPMG firms' clients about is private jets and we set out the main considerations for this asset below.

Potential tax changes

Once an individual has purchased a luxury asset such as artwork, it is likely that there will be few times in its life that it crosses borders. However for luxury travel assets such as private jets, they may cross borders on a weekly, or even daily basis.

Import taxes (customs duty and import VAT) apply when assets cross borders. Thankfully, for those moving assets within the EU, the concept of `free circulation' (import taxes have been paid in the EU) or temporary admission (import taxes have been suspended for a specific period of time) makes flying a jet across borders within the Union far more simple than it otherwise might be. Once an asset is in free circulation, a private jet typically travels within the EU without any further costly imports or exports being made.

When the asset leaves the EU, there are various reliefs that may apply so that the `export', when the jet leaves the EU and `import' or admit when it returns is fairly seamless and if the correct criteria are adhered to a liability will not arise (e.g. the customs duties and import VAT will either be considered as having paid in the EU originally or will be suspended due to the use of a customs relief). For those who have dealt with customs and VAT structuring for luxury assets previously, they will know that structuring the purchase correctly when the asset is acquired is key to achieving tax efficiency and that there are pitfalls to be avoided to keep the aircraft within free circulation and able to claim the necessary customs and VAT reliefs. It is clear though that the existence of the union goes a long way to simplifying the process.

So how could this change under a Brexit `no deal' scenario?

In short, the UK (including crown dependencies like the Isle of Man where many private jets are registered), would be outside the EU, so any time the plane is flown to the UK, there will be a deemed export and then an importation when the jet flies back to the EU, or vice versa dependent on where the plane is based. The question will be how `seamlessly' this can occur. Will people have access to the same reliefs as they previously did? What forms will need to be lodged to reduce or remove any liability?

Just as owners currently have to avoid pitfalls under the existing regime, the new regime will come with bear traps to be avoided too. A good example of this is how a relief known as `Temporary Admission' may apply following Brexit. If a UK registered private jet leaves the UK and flies to the EU post-Brexit, then it is likely that `Temporary Admission' relief will be available to stop any liability arising there, regardless of whether the owner is resident in the EU or the UK. However, if the owner is resident in the UK and the aircraft registered out of the EU (the UK or the Isle of Man for example), then the jet can stay in the EU, potentially for up to 18 months in suspension of import taxes, but if the owner is resident in the EU, then the jet can only stay in the EU for a matter of hours. Should the jet remain in the EU for more than a couple of hours, the customs authorities in the EU country where the aircraft is will be of the view that a customs debt has arisen there. Whilst on the surface the relief does the same thing (suspension of import taxes), a misunderstanding of how it varies in different situations post-Brexit could prove costly.

Another consideration is whether the current circumstances of the jet (i.e. where it is registered and where the owner is resident) will affect whether a VAT liability will arise if these circumstances change. As readers will likely be aware, a private jet should generally attract a 2.7% customs duty rate at importation in the EU. There are however circumstances where this might not have been originally payable which could change post-Brexit. Alternatively it might have been paid in full but as a consequence of a no-deal Brexit the owner of the jet may have to decide whether they want the jet to be considered in free circulation in the UK or in the EU and fly it to the UK or the EU the day before a no-deal Brexit takes place. With a luxurious private jet potentially costing in excess of US$80 million and import VAT being based on the customs value of the aircraft, the purchaser could face a considerable tax payment to the authorities if import VAT becomes payable, with the rate in the EU ranging from 17% (Luxembourg) to 27% (Hungary).

It is no surprise that tailor made travel requires tailored advice, and the exact implications and how these can be managed will be dependent on each owner's specific circumstances, but as the above demonstrates, a misstep whilst travelling could prove costly. There may be steps that owners can take now to protect their position, or give them the knowledge to be confident of the implications of travel post-Brexit.

Although Brexit is perhaps the most prominent example of potential tax regime change resulting from geo-political volatility, it highlights the importance for individuals and family offices - wherever in the world they live or possess luxury assets - of reviewing their holding structures from time to time to ensure they are fit for purpose and that horizons remain broad and clear.

If you would like to discuss potential Brexit implications further, we'd love to hear from you, or alternatively contact your local Family Office & Private Client advisor.

Authors: Catherine Grum, Head of Family Office Services, KPMG in the UK and Olivier Sorgniard, Director of Indirect Tax and Customs, KPMG in the UK.

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