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The Equine Investment Of Passion


Julie Butler - Expert Author

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For tax purposes the very use of the words ‘investment’ and ‘passion’ could instantly mean non allowability for Business Property Relief (BPR) for Inheritance Tax (IHT) by use of the word ‘investment’.

This statement implies that firstly the activity is an investment not a business (section 105 ss 3 IHTA 1984) and passion can state that the reason behind the investment is not commerciality but a hobby or an activity that does not have all the necessary badges of trade and therefore is not a business and is therefore not eligible for BPR.  If any investment in an equine activity is to take place it would be very financially reassuring if there was the potential availability of BPR and APR (Agricultural Property Relief).

One of the fundamental attacks by HMRC on equine businesses is that of commerciality.  Whilst HMRC are often prepared to accept that there was actually a business, they are not prepared to accept that it was a business carried on for gain and therefore HMRC argue that BPR does not apply.  Many entrepreneurial businessmen, when they sell off their business interests at what they consider an appropriate retirement age, often want to rollover that gain into an “investment of passion” to take the advantages of the capital gains tax relief on the disposal.  Their choice is often the equine or the racing business.  A prime example can be a stud farm which is farming for tax purposes and therefore has the advantage of APR as it involves the investment of land.  The stud farm can present a hugely satisfying lifestyle choice.  Land prices showed a large increase between 2005 and 2010 and, whilst there have been problems with profitability and showing a good return on the monies invested in that commercial passion, the value of the underlying assets has increased dramatically.  It is therefore important to “frank” that investment with IHT reliefs where appropriate and where they can be justified to HMRC and this is mirrored by the fact that HMRC seem to have decided it is “open season” against such IHT claims.

Much is documented about the HMRC approach in the IHT manuals, advising inspectors to look out for the rich man’s hobby and the root of their attack will rest in checking business plans and that is the identification of the fundamental motive for the business decision - is this business or private?  Is this a commercial activity or hobby?

In this HMRC attack on the world of “all things equine” there are many genuine equine activities which are suffering.  A lot of the racing/breeding operations have suffered from the recent problems in racing and have literally been “blown off course” (see the income tax case Walls v Livesey) and are potentially and fundamentally profit making. 

It is worth returning to the 1982 communication from HMRC to the Thoroughbred Breeders’ Association (TBA), which stated: ‘We have long accepted that the breeding of thoroughbred horses is such a long-term venture, and provided that a stud farming business is potentially profit making, we would not normally seek to invoke section 397(1) until after 11 years from the start of the business’ (but note that the Income and Corporation Taxes Act, ICTA 1988 s 397 is replaced by the Income Tax Act ITA 2007 s67).

There are a number of clear directions outlined in HMRC’s statement.  The business must be ‘potentially profit making’.  A recent relevant case, John Agnew (TC566) was actually about a beautician’s business, but the key factor here was whether, within the existing structure, the business was capable of making a profit.  There are two ways to prove whether potential profit exists: either by achieving an actual profit, or by showing that a profit can and will be made through accurate, well thought out business plans.  There has to be a ‘financial road map’ for the equine operation showing how the business has learnt from its own specific mistakes, as well as from generic mistakes common in the trade and any problems arising in the bloodstock industry.

It is also important not to muddle breeding of horses on the stud (which is agriculture) with other equine activities and essential for the tax adviser to undertake the correct fact find as to the nature and commerciality of the “investment of passion”.

About the Author

Supplied by Julie Butler F.C.A. Butler & Co, Bennett House, The Dean, Alresford, Hampshire, SO24 9BH.  Tel: 01962 735544.  Email;, Website;

Julie Butler F.C.A. is the author of Tax Planning for Farm and Land Diversification (Bloomsbury Professional), Equine Tax Planning ISBN: 0406966540, and fStanley: Taxation of Farmers and Landowners (LexisNexis)

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Article Published/Sorted/Amended on Scopulus 2012-06-26 13:14:14 in Tax Articles

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