Horse racing has at last returned (albeit behind closed doors) following a short hiatus during lockdown which sadly saw the demise of this year’s Grand National meeting and the postponement of the Derby and the Oaks. However, now that racing is back, have you got your tax affairs in order?
For some years now, breeding thoroughbred racehorses has been considered easy pickings for tax receipts by HM Revenue and Customs (HMRC). Perceived as a “rich man’s hobby,” tax inspectors have been instructed to carefully examine whether thoroughbred studs are commercial businesses. If HMRC consider this to not be the case, the so-called breeding enthusiast may find themselves receiving a large tax bill either during their lifetime or even after their death. Obviously, anyone involved with horses knows that they don’t often make you rich – quite the opposite in fact!
Arguably, Stud farming is not a hobby because of the great potential for financial losses, especially during the current economic downturn and following a likely “no-deal Brexit” which will undoubtedly impact on thoroughbred breeders’ ability to export bloodstock in the EU, including the Republic of Ireland. One would need to be exceptionally wealthy to withstand such financial losses as their hobby.
The best way to stay on the right side of HMRC while also being able to claim Agricultural Property Relief and Business Property Relief on death and making loss claims for Income Tax during a breeder’s lifetime is to ensure that the Stud can show that it is commercial business which carries out “active husbandry” for the animals in its care.
In order to claim Agricultural Property Relief on your estate, your executors will need to provide evidence to HMRC of the Stud being a commercial enterprise such as advertising and publicity materials for the Stud, full particulars of sales, the number of horses held at the date of death of the proprietor and their breeding records in recent years as well as sets of accounts for the business. Well meaning Stud owners can accidentally scupper their own tax planning by being quoted in publications such as Horse and Hound or The Racing Post saying things such as “we don’t do this for the money” or “our horses are our family and we hate to part with them.” HMRC will go looking for this information and such statements do not help to prove that the Stud is a commercial enterprise worthy of Agricultural Property Relief and Business Property Relief.
The other important factor to consider when tax planning for your Stud operation is to ensure that you clearly separate your breeding interests from any racing interests you may also have. Stud farming is considered as farming and thus carrying on a trade regardless of its commercial viability. It is therefore a taxable activity. Conversely, racing is considered not to be a taxable activity. It is important to be able to differentiate between the two types of activity on your tax return (or for the executors of your Will to be able to do so when you are not longer here).
Particular attention should be given to any transfers of horses from the Stud into training. If a breeder transfers a horse to training and it is then returned to Stud at a higher value after a successful racing career then the uplift in the market value of that horse whilst it was in training is tax free. Furthermore, the value at which the horse is returned to Stud following a successful racing career is relieved over its lifetime. The valuation of horses at the date of their transfer to or from training are therefore significant for tax planning purposes. Your Bloodstock Agent and your Stud Secretary will be your best friends when it comes to calculating this.
Those who can combine their love of thoroughbred horses with their job are very fortunate indeed. Don’t let your passion for your job get you caught out with your tax affairs. Horses are good enough at eating our money without us helping them to do so. Contact a member of our Agricultural team for more information and advice on 01653 600070.