Tax and horses: Reining in expectations
Keeping horses and ponies can be a very expensive hobby, so owners often look for tax relief. Helen Thornley takes a canter through the tax rules to check when the deduction hurdles can be cleared.
While most horse-owners know not to expect tax relief for the day-to-day costs of keeping a horse or pony for leisure purposes, attempts have been made to use the ability to keep horses as a justification for expanding the land that qualifies for principal private residence relief (PPR) to beyond the basic permitted area of half a hectare.
In Longson v Baker, the taxpayer argued that PPR should apply to an area of land including stables and grazing because such facilities were required for the reasonable enjoyment of the property. The courts held otherwise, ruling that, while it might be beneficial for the equestrian-minded taxpayer to benefit from the larger area around the property, it was not objectively required for the enjoyment of the property by any other taxpayer.
Equestrian activities may also struggle to qualify for agricultural property relief (APR) for inheritance tax. Land grazed by horses used for leisure purposes is not considered to be in agricultural use.
However, land used in a stud farm or as grazing for working horses could be. Horses are sometimes used for forestry work where the land is inaccessible to vehicles, and I have also seen the use of horse-power for ploughing on organic farms.
Angels on horseback
Where the parents of horse-mad and talented offspring may be able to obtain some tax relief, is if the horsey venture can be sponsored by the business.
In Freshgro (Bicester) Ltd, a wholesale fruit and vegetable business obtained partial relief for the VAT costs of leasing a substantial horse box used by the owner’s son. The son was a serious show-jumper and, in addition to advertising on the box itself, the company sponsored classes at national events and had paid to add the ‘Freshgro’ name to the horses he rode. While the tribunal was not prepared to admit full relief for the VAT costs of the lease, it did allow relief on an apportionment basis.
Parallels could also be drawn to The Crown and Cushion Hotel (Chipping Norton) Ltd (TC05492) where the company was able to obtain corporation tax relief on the costs of sponsoring the owner’s granddaughter’s activities as a racing driver.
However, tax relief is not guaranteed. In Executive Network (Consultants) Ltd v O'Connor the costs of sponsoring the shareholder’s wife’s riding school (attended by his children) were disallowed as the expenditure was not wholly and exclusively for the purposes of the business.
Thelwell's riding academy
Where horses are kept for business purposes, as for a riding school, then tax relief should follow the usual rules. The school’s equine contingent would be eligible for capital allowances and private use adjustments would be needed for the owner’s own steed(s).
Sometimes owning a horse is not enough, and owners can become breeders. If keeping a horse or pony is expensive, breeding them is even more so, with very uncertain pay-offs.
Stud farming is taxable as a farming activity, so you need to ask whether the activity is intended to be commercial or a hobby.
Breeding activities can often be linked to horse racing. While stud farming is taxable, racing is generally not (although there are special VAT rules which might be beneficial), so great care is needed when transferring animals between the accounting records of the two activities.
When a home-bred animal starts its racing career, it will be transferred to the racing books at its market value. If this value is more than the costs of rearing (including the stud fee and the cost of keeping the mare until the foal was weaned), then a profit subject to income tax will arise in the stud farm’s books.
Once in training to be race animal there is no tax relief for training costs, but if the horse is successful there is no tax on any winnings. If, after a successful career, the animal is transferred back into the breeding books at increased market value, any uplift in value is tax-free. Tax relief will then be given for any subsequent decline in the value of the animal.
Special rules apply for losses in stud farming because the outcomes are so uncertain. For general farming, sideways loss relief is restricted after five years of losses. For stud farming, HMRC recognises this can be a very long term endeavour and it will (provided that the venture has the potential to make a profit) accept sideways loss relief claims for up to eleven years from the start of the business.
The key point for horsey matters to establish the owner’s facts and motivations, identify any leisure and personal pursuits, and separate those costs from any commercial activities.
Given that the costs of keeping a horse or pony vastly outweigh the costs of an animal like a dog, there can be a lot of pressure to find a way to obtain tax relief for some or all of the costs. Advisers may need to work hard to rein in their client’s expectations.
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Helen Thornley has a focus on personal and capital taxes. Initially training as an accountant before moving to tax, she worked in practice until her appointment as a technical officer in 2017. She also has an interest in the history of tax.