What is a horse?
On the face of it, this is a silly question. A likely response being ‘it is an animal with four legs used for riding.’ However, if we ask further questions such as, who owns, and rides the horse and what is its main purpose, then the answers will lead to a different accounting and taxation treatment.
Depending on the function it performs, a horse may be an agricultural animal, or it may not. A horse is an agricultural animal if it is intended for human consumption, or to work as a draught horse, e.g. pulling ploughs. Draught horses are virtually non-existent in the UK now, and the UK is not renowned for consuming vast quantities of horse meat. Realistically, the only horses in the UK still qualifying as agricultural animals are used for breeding, regardless of the ultimate use of the progeny. Commercial studs where horses are bred, be that thoroughbreds, event horses, or Shetland ponies, generally qualify for trading and agricultural reliefs.
Stud horses
- Breeding stallions are generally classed as a fixed assets, are included on the balance sheet and are depreciated over their estimated economical life. Capital allowances can be claimed, as plant and machinery.
- Brood mares are generally treated as trading stock and included at the lower of cost and net realisable value.
- Foals and youngstock bred for resale are also treated as trading stock and included at cost, which includes nomination fees and associated breeding costs, as well as ongoing annual costs.
Competition horses
- A competition horse owned for pleasure where the owner pays for all the costs associated with the horse and may ride the horse or pay a professional to do so is likely to be classed as a ‘hobby horse’ or, more specifically, a horse purchased/bred without any intention of creating a trading activity. Horses such as these are wasting assets, i.e. they have a life expectancy of less than 50 years. They are exempt from capital gains tax purposes; therefore, if a taxpayer buys a horse which turns out to be a successful competition horse and is sold for significantly more than it cost, the profit from sale will generally be exempt from capital gains tax.
- Competition horses belonging to professional riders and used as part of an equestrian trade form part of the apparatus with which a trade is carried on; these can qualify as a fixed asset on which capital allowances may be claimed. The same can be said of horses used in a riding school, or trekking centre which are also treated as plant for capital allowance purposes.
Where there is a trading business and a horse is purchased or bred for resale, it is more likely to be classed as trading stock, no capital allowances are available and any profit on disposal forms part of the trading profits of the business.
The accounting and taxation treatment of horses can be complex and to ensure you have the correct accounting and taxation treatment (including VAT), it is essential to understand the intentions of the owner or business from the start.
If you require further information, please contact Lucie Hammond at Hazlewoods on 01242 680000 or lucie.hammond@hazlewoods.co.uk
