A QUESTION that continues to be asked is: ‘Can I sell a horse tax free?’

To look at this question is quite complex and needs an understanding of whether a trade or hobby is being carried on.

If a person is carrying on a trade, the income will be liable to income tax or corporation tax depending on the structure. Distinguishing if a trade is being carried on, is often far from clear, so if in doubt, professional advice would be needed in advance of adopting any particular tax treatment.

A farming activity for tax purposes can be defined as an activity for which land and estate is occupied for the purposes of husbandry. If an existing farming trade is being carried on, then the introduction of a new trade may need to be kept separate.

However, bloodstock is deemed to be the husbandry of animals and therefore farming is a single trade and would not need to be kept separate.

“However, the statement is often made ‘My bloodstock operation is a hobby.’

If a hobby is being carried out, then any profits are not liable to income tax and conversely no relief is available for any losses incurred. Therefore the main point in this is that the income is not taxable but the expenses are not allowable. The question of whether a tax payer is carrying on a trade is primarily based on the fact. Some of the primary considerations to help determine if the hobby has made the transition to full blown trade are found in the ‘Badges of Trade’.

BADGES OF TRADE

The issue of whether a taxpayer is carrying on a trade is one of fact. The definition of a trade for tax purposes is so broad that case law is relied upon to give guidance. The courts have in considering the existence of a trade being influenced by the views of a 1954 Oil Commission in the UK which identified ‘Badges of Trade’ factors which are generally relevant when considering whether a transaction is being undertaken by a tax payer in a trading capacity.

These ‘Badges of Trade’ are as follows:

  • Subject matter of the realisation - whilst almost any item can be acquired for trading purposes, some items are more likely to have been acquired for trading purposes.
  • Length of ownership - items purchased for resale are normally realised in a short period of time where items acquired as investments would be held over a longer period.
  • Frequently a number of transactions - trading normally occurs involves a number of transactions. If realisation of the same type of property occurs in succession over a period of time there is the presumption of trading in respect of transaction.
  • Supplementary work in connection with the item – this badge of trade involves a determination of whether the person making the sale has carried on any work on the goods sold in order to make the goods more saleable.
  • Circumstances giving realisation to the realisation of the property – the Badges of Trade involved in determining whether there are special circumstances dictating or requiring the sale which might negate the concept of trading.
  • Motive - This Badge of Trade involves deciding whether the object was to deal in the property sold.

    • TRADE VERSUS HOBBY

    As horses are wasting assets and have a life span of less than 50 years, they are never considered to be investments and cannot be held liable to Capital Gains Tax however, one then has to determine whether it is a trade or a hobby.

    The principal factors in this case would be the frequency of the transactions:

    1. Are mares and foals being bred and bought and sold on an annual basis?

    2. The motive of the taxpayer - is it the taxpayer’s intention to make a profit from this activity or simply have an interest for hobby purposes?

    In order to be able to put forward a credible case that such an activity constitutes a hobby, one would have to demonstrate some rather unusual features to differentiate it apart from normal breeding. Factors could be held to be, now and in the past:

    1. A pony/ponies for children

    2. An interest in a racehorse in training or involved in show jumping

    3. A significant part of your leisure time is spent on the activity

    In addition, when one animal is involved it is easier to conform to the hobby criteria.

    Non-commerciality is the issue, therefore the question that needs to be addressed is whether the activity was carried out on a commercial basis and with a view to realisation of profits, therefore the breeding of horses by a farmer would in normal circumstances be deemed to be part of his trading income.

  • The breeding of a horse, a hobby by a non farmer for his own enjoyment, would not be trading and would be a hobby. However the breeding of a horse for sale could constitute the animal being liable to tax.
  • The definitive issues surrounds what actually happens as to whether it is a trade or a hobby. Racehorse training and the sale of a horse sold out of training apart from by the trainer themselves, is deemed to be a hobby and therefore not liable to tax.

    • The area is far from clear, but if one is doing it with a view to making a profit then it is liable to tax and losses are allowed if it makes a lot. However, if it is being done as a hobby then the income is not taxable and the losses are not allowed.

    Seek good professional advice to be certain