Private jets offer tremendous benefits but there are a range of issues to be considered before embarking on selecting and buying one.

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Graeme McLellan
Partner, Aircraft Finance and Leasing
D: +44 20 7809 2618
M: +44 7976 363 769
E: graeme.mclellan@shlegal.com
Graeme is a Partner in our award-winning aircraft finance team.
Chambers Directory 2016 ranked Graeme for his expertise in the private
aircraft sector and client quotes included:
"he has a particularly high reputation within the industry."
"excellent attention to detail and a very strong grip on the law."
BUYING A PRIVATE JET
Private aircraft have been put to an astonishing range of uses. One of the first private
business aircraft was delivered in 1929 to Harry Ogg, President of the Automatic Washer
Company. Harry's aircraft included a fully equipped office – together with four of his washing
machines for customer demonstrations.
A private aircraft in the RJR Nabisco fleet also came to the rescue when Rocco the German
Shepherd bit a security guard. To avoid Rocco being seized, quarantined or dispatched to the
permanent departure hall in the sky, he was placed on a corporate jet – under the passenger
name "G. Shepherd" – and secretly spirited away. Perhaps Rocco should have been left
behind at that stage – he subsequently bit the gardener and settling the claim proved
expensive.
Leaving aside their use as aerial showrooms, or for rescuing badly behaved pets, private jets
are the closest thing we have to teleportation. Their many benefits include:
• accessing airports closer to where passengers actually want to go – in the USA, for
example, they can access 5,000 airports instead of the 500 served by commercial
carriers,
• enabling direct point-to-point flights, avoiding time-intensive connections,
• providing increased flexibility – take-off can be only a few minutes after arrival at the
airport so there is no need to wait for the next flight if a meeting or traffic has made
you late, and there is also no need to wait at luggage carousels at your destinations,
• significantly shortening the time required to visit several destinations, thereby
economising on other travel expenses (such as hotels, meals, taxis etc.),
• employing time spent in the air in a more efficient manner, perhaps using the privacy
of a jet to conduct confidential business, and
• by reducing time spent travelling and using that travel time more productively, freeing
up precious family or leisure time.

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The purchase and operation of a private jet does, however, require significant analysis and
planning. The type of aircraft, how it is to be operated, how it is to be financed, regulatory
requirements and tax implications all need careful consideration for the optimal
arrangement.
Operational Requirements
In selecting an aircraft, everything is a compromise between range, speed, weight and costs
- both in terms of the purchase price and also the running costs:
Consider this key question – What are the operational expectations for the aircraft?
To ascertain this, start by assessing each of the following points for both your current and
anticipated future requirements:
(1) the frequency of use,
(2) the typical average and maximum distances flown,
(3) the typical average and maximum number of passengers,
(4) the required level of comfort and performance,
(5) whether a pre-owned aircraft could be considered,
(6) if a corporate jet, whether the aircraft is to be (a) used to transport clients / guests
too, and/or (b) made available for private use by management / employees,
(7) whether the aircraft is to be made available for charter when not otherwise required,
and
(8) the feasibility of alternative options (including scheduled airlines and fractional
ownership).

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If analysis suggests the typical flight is 2 hours carrying 2 or 3 passengers, then it may be
inadvisable to purchase an aircraft with a range of 6,000 miles and capacity for 10
passengers.
For families, consideration may also be given to whether a private aircraft is to supplement,
or entirely replace, any existing fractional ownership or other private aviation arrangements.
Family members accustomed to unlimited access to such arrangements may resent their
cessation and having to use commercial flights when the new private jet is not available.
Aircraft Selection
There is a potentially bewildering range of aircraft available. Many people find a good place
to start is speaking with their friends and prospective aircraft operators, benefiting from their
knowledge and experience.
Categories of Aircraft
The optimal aircraft provides the required level of operational capability at the lowest whole-
life cost. Jets are typically categorised, based on cabin size and range, as:
• very light,
• light,
• medium,
• large / heavy / ultra-long-range, or
• large corporate airliners.
Unsurprisingly, for larger aircraft all aspects of the whole-life cost (and not only the purchase
price) tend to be correspondingly higher.
Consideration should be given to the following questions:
• is it necessary to purchase an aircraft which can service all requirements?
or
• could significant savings ultimately be achieved by purchasing an aircraft which can
service the majority of requirements and supplementing this by using scheduled airlines
for occasional very long-haul flights and chartering aircraft for unusually large group
trips?
We see a number of owners who, with the benefit of hindsight, wish they had adopted the
second approach and purchased a smaller aircraft which was both cheaper to buy and less
expensive to operate.

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Whole-Life Costs
Once the preferred category of aircraft has been selected, consideration should be given to
the whole life costs of the different aircraft being considered within that category:
It is worth preparing an expected (and realistic) budget for all of these costs over time
periods of, for example, 1 and 5 years. This budget may prove invaluable in assisting with
aircraft selection.
Once a particular manufacturer and model have been selected, for purchasers of new aircraft
the really fun part begins - selecting the exterior options and the interior fit-out.
Many manufacturers suggest an off-white exterior as standard. Tempting as it may be to opt
for a sleek, smart, black exterior, do remember that parking dark coloured aircraft in strong
sunlight can result in warping or other permanent (and expensive) damage.
When selecting an interior fit-out, almost anything is possible but:
• bear in mind that everything has to be certified by the relevant authorities, driving up
overall costs significantly – try to resist the temptation to install whirlpool hot tubs, or
the very latest flip up televisions, and
• think about any future sale of the aircraft and moderate your wildest dreams
accordingly. There are numerous unsold aircraft with interiors which may, kindly, be
described as alternative.

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Operation and Maintenance
Private jet owners can choose to operate their aircraft in one of two main ways:
(1) by establishing their own operator / in-house flight department, or
(2) by engaging a specialist aircraft operator.
Setting up your own in-house operator may be attractive, but the time, costs, legal
requirements and hassle involved in recruiting pilots and crew as well as complying with the
administrative requirements for the legal and safe operation and maintenance of the aircraft
carries a price – and may not offer the desired degree of flexibility.
If a "one stop shop" specialist operator is engaged then an operation and management
agreement should be implemented and specialist advice obtained. Sometimes such
agreements must be in the form of an aircraft lease agreement; some aircraft registers only
permit registration of aircraft by either owners or lessees, in which case the proposed
operator would have to be comfortable that it satisfies such "lessee" requirement.
Chartering an aircraft to generate additional revenue, when it is not otherwise required for
business, generally triggers additional legal and regulatory requirements. These additional
complexities may be best handled by engaging a specialist operator. Take care, however, as
not all operators hold the licences required to operate charter flights.
A further benefit of engaging a specialist operator is that they may be able to undertake
some maintenance without having to enrol the airframe / engines / auxiliary power unit on
Maintenance Service Plans (or MSPs).
If a specialist operator is engaged, replacement is relatively straightforward and we regularly
see aircraft owners switching operators, sometimes for seemingly trivial reasons such as
better catering. We also see owners switching from specialist operators to their own in-house
departments and vice versa.
Finally, any financier will also have views on operators, maintenance arrangements, MSP
enrolments and chartering of the aircraft – all of which may need to be accommodated.
Avoiding Abuse of Corporate Jets
Adopting a formal policy on corporate jet use should reduce the risk of potentially
embarrassing disclosures and the associated risk of shareholder or public criticism. Listed
companies in particular may wish to adopt a formal policy to control the use of aircraft,
especially when local laws require the disclosure of corporate aircraft and their use in annual
reports.
Policies often cover appropriate business use, limitations on which executives may travel
together, guidance on which executives take priority, acceptable private use of the aircraft
(including guidance on family and guests – and their use in spiriting away badly behaved
pets), security procedures, whether the aircraft may be chartered, as well as steps to be
taken in the event of any accident or incident.

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Import Duties, Sales Tax and Other Taxes
Tax planning is crucial. Specialist advice should be taken in relation to import duties, sales /
transfer taxes, depreciation allowances and also the various taxes relating to operating costs.
Beware of excessively aggressive tax structures. For a time, private jets were being
imported into India without payment of the relevant duty on the basis of claims they would
be used for commercial purposes – the difference in the applicable rates of duty could exceed
20%. Indian customs authorities then seized a number of private jets imported in this way
on the basis that issuing "tickets" to owners and family members did not qualify the aircraft
for the lower commercial aircraft rates of duty. The banks financing some of the jets seized
were also unimpressed.
Acceptable ownership, importation and operating structures are sometimes available to
mitigate duties and taxes, but not always. For example, the rules regulating importation of
aircraft into the EU are complex with many mitigation structures requiring the
implementation of chartering arrangements – if, however, the aircraft will never realistically
be made available for charter (or has a state of registration which expressly prohibits
charter), it may be simplest to pay the value added tax / import duties at the lowest rate
attainable.
The operation of the aircraft also generates various tax issues, including the fuel duty regime,
sales taxes on operating costs and taxation of benefits-in-kind. Again, advice can usefully be
obtained to ensure the proper tax treatment is being given and whether any mitigation
structuring is available.
Cash or Finance?
This too requires careful consideration. Payment in cash is simple and avoids both
negotiating financing documents and subsequent reporting and other obligations to a
financier. Conversely, companies and individuals may have return on equity targets and it
may be attractive to finance the aircraft, deploying elsewhere the funds which would
otherwise have been used to purchase the aircraft. Financiers also have extensive
experience which may result in the overall arrangements being more robust for everyone.
The financing market is currently very favourable, offering attractive interest rates on good
loan-to-value ratios. A range of financing solutions exists, including secured debt and various
types of lease. Some solutions will part-fund pre-delivery payments; others will apply only
from delivery. Where financing is being considered, advice should be obtained on the
benefits and implications of the various options, including the tax implications (in particular
regarding depreciation and any charter revenues) and on-going obligations to financiers.
Some structures to mitigate import taxes do not sit comfortably with certain types of
financing.
It should also be noted that financiers generally require financial disclosure, guarantees (so
that recovery is not limited only to recourse to the aircraft itself), periodic loan-to-value ratio
testing (possibly requiring partial early prepayment of the financing), registration of their
security interest and a nameplate on the aircraft noting their security interest. A number of
financiers now treat such financing for high net worth individuals as part of a wider wealth
management relationship and may require significant sums to be deposited as assets under
management (AUM). It should also be noted that the laws regarding personal guarantees
can be complex, including consideration of jurisdiction of nationality, jurisdiction of residence

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and marital status – certain combinations require, for example, that a spouse must also sign
a personal guarantee.
This is an example of one structure for a secured debt financing:
Purchase and Ownership
Title transfer and the ownership structure of the aircraft are two key areas where there are
many traps for the unwary.
If the aircraft is new, obtaining good title from the manufacturer should be straightforward.
If, however, the aircraft is pre-owned, advice should be obtained to ensure that good and
marketable title is being properly transferred by the seller to the buyer. A reassuring
warranty that the seller is transferring full title is only as good as the economic substance of
the legal entity providing that warranty – it is of limited benefit if it is provided by a special
purpose company with no other assets and which is promptly dissolved following the aircraft
sale.
Similarly, purchasers should consider both (1) warranties from the manufacturers and
maintenance providers to ensure the benefit of these is transferred effectively; and (2)
indemnities from the seller (again, backed by an entity of economic substance) in relation to
any claims brought by third parties in respect of the aircraft and relating to the period prior to
the title transfer.
The ownership structure adopted will depend on a range of factors, including the nature of
the corporate group, place of residence / incorporation, where the aircraft is to be registered
(given that some registers have citizenship / ownership requirements) and whether the
aircraft is being financed.

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Common aircraft ownership structures include:
(1) special purpose companies within a wider group of companies,
(2) special purpose companies owned by a family trust,
(3) individuals holding title directly,
(4) partnerships / limited partnerships (including for tax purposes), and
(5) trust arrangements to address registration requirements (e.g. for non-U.S. citizens
wishing to register their aircraft in the USA).
Again, care needs to be taken. By way of example, a special purpose company established
within a corporate group to own and operate the group's aircraft which then charters the
aircraft to related group companies may find itself in breach of local legal requirements
designed to protect third parties entering into charters on an arm's length basis. In many
instances the penalties for such breaches are severe and can invalidate the aircraft's
insurance, leaving the owner financially exposed. This issue can be resolved by restricting
the special purpose company to merely owning (not operating) the aircraft and leasing it,
without pilots, to related group companies.
Conclusion
The benefits of buying a private jet can be significant, but such a purchase is not without
issues and requires careful analysis and consideration. Obtaining specialist advice at an early
stage, particularly on aircraft choice and tax issues, can help ensure the experience is
overwhelmingly positive.
A version of this article was first written for the 2nd
Annual Global Private Wealth Forum
on 17 May 2016.
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