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Preserve invested capital
Cash payment, bank financing, Lombard loan or a hybrid solution: deploy capital where its true cost is lowest.
An important acquisition is not simply a matter of choosing between cash payment and financing. It should be considered in the context of your overall wealth, tax position, liquidity and future plans.
Deploying €500,000, €1 million or more towards an aircraft acquisition can be entirely compatible with a sound wealth management strategy.
But the right decision is not necessarily the one that minimises the amount borrowed.
Taxation, returns on retained assets, the cost of financing, available liquidity, market risk and future plans should all be assessed together.
Cash payment, bank financing, Lombard loan or a hybrid solution: deploy capital where its true cost is lowest.
Taxation, opportunity cost, returns on retained capital and the cost of financing can materially change the equation.
Multi-currency assets, Luxembourg life insurance, portfolio-backed financing and international mobility should be considered together.
Anticipate ownership costs, new investments and future projects without being forced to sell assets.
The cost of financing should also be measured against what it allows you to keep invested.
A project to finance Wealth to preserve
Which resources should be deployed, in what proportions,
and on what terms?
Four approaches may be considered. None is inherently superior. The right decision depends on your personal circumstances, your objectives and the structure of your wealth.
How do the strategies compare over 10 years?
Starting assumptions: an aircraft valued at €2.8m(1) and a €12m Luxembourg life insurance policy(2), invested in conservative assets with an assumed 5% net return. We compare the impact of three financing strategies on the overall wealth position.
Net withdrawal from the life policy: €2.8m
€2.8m over 10 years at 4%
€2.8m Lombard facility at 3.0%
These approaches are not mutually exclusive. Depending on the overall wealth structure, partial divestment may be combined with an amortising loan or a Lombard facility to seek the right balance between cost, tax considerations, liquidity and the preservation of invested capital.
Ownership cost assumption: €500,000 per year.
Life insurance policy value: €12m, comprising €7m of premiums paid and €5m of gains. Policy opened in 2016; assumed net return of 5%; tax assumed at 24.7% on the gain component of each withdrawal, excluding any applicable annual tax allowance. Ownership cost assumption: €500,000 per year.
Total financing cost: €601,837. Loan instalments are funded progressively through partial withdrawals from the life policy, with compounding and the associated tax liability recalculated over time.
Lombard facility with capitalised interest: €2.8m at 3.0% over 10 years. Aircraft ownership costs (€500,000 per year) are also financed progressively through the Lombard facility, with no withdrawals from the life policy. Debt at maturity: €9,600,749, comprising €7,800,000 of capital advanced and €1,800,749 in financing costs. LTV: 23.3% initially and 49.1% after 10 years. The initial LTV of 23.3% may provide scope to negotiate the rate; a 0.5 percentage-point increase in the rate would increase the debt to €9,947,720, representing €2,147,720 in financing costs (+€346,971). The debt is denominated in euros and secured against liquid, eligible assets. At maturity, the facility may be repaid or refinanced: refinancing allows the life policy to remain invested while deferring taxation. Full repayment funded by a policy withdrawal would require a gross withdrawal of approximately €11,409,704, of which €1,808,955 would represent tax, leaving approximately €8,137,031 in the life policy.
Depending on the circumstances, Luxembourg life insurance can provide an investment architecture suited to substantial, international or multi-currency wealth.
The currency of the acquisition, income and financial assets may create risks or opportunities that should be incorporated into the analysis.
A major acquisition should also be considered in light of expatriation, a change in tax residence or the ownership of assets across multiple jurisdictions.
Financial and property assets, income, taxation, liabilities, liquidity and future plans.
Cash payment, bank financing, Lombard loans and hybrid solutions.
Financing cost, taxation, expected returns on retained capital, liquidity and risk.
Select a structure that is consistent with your overall wealth, rather than solely with the aircraft acquisition.
Are you considering a significant aircraft acquisition and looking to assess its impact on your wealth before deciding how best to finance it?
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