Alison Hall, a Partner in our Rural and Farming team, looks at the inheritance tax implications of owning horses.
Many of our rural and agricultural clients own horses. Some run liveries and equine centres, some offer grazing whilst others have their own horses for the benefit of the family.
Most people will agree that owning horses is an expensive business but even if you run the horse enterprise as a trade, there may be a hidden charge. These Trojan horses could have a serious impact on the eligibility of the land and business for Inheritance Tax purposes.
Inheritance Tax relief is available on agricultural and business assets provided certain tests are satisfied.
Most farmers would expect the value of their land to qualify for agricultural property relief (APR) at 100%. However, APR is only available on the agricultural value of the land and only if the land is used for agricultural purposes. HMRC does not regard the grazing of horses as an agricultural purpose unless the horses are:
Any buildings used for horses which are in connection with these activities would also qualify as agricultural and APR would be available on the agricultural value.
For a stud farm to qualify, there has to be proof of profit along with proof of sales and advertising. A stud farm run as a “hobby” with no gain will not qualify for APR.
APR is only available on agricultural value and there may be development potential on the land and buildings used for horses. In these cases business property relief (BPR) may be available on the additional value. However, to qualify for BPR, the land/buildings in question will need to be owned by the business.
If the horses are not agricultural, any land/buildings used will not qualify for APR and are unlikely to qualify for BPR. HMRC do not generally regard the keeping of horses as a trade for Inheritance Tax purposes. Even a livery may not qualify. Certainly a DIY livery will not qualify for BPR.
To establish that a livery is a business for the purposes of BPR, the taxpayer needs to show that the business is “a serious undertaking earnestly pursued”. The level of service provided by the livery owner needs to be more than simply providing accommodation which HMRC does not regard as a trade. The taxpayer needs to organise mucking out, vet visits, feeding, lessons, equine supplies perhaps all-weather and indoor facilities. Additional services such as holiday accommodation, trekking and hacking and show jumping can all help to establish this is a trade.
So why is this important?
The importance of both APR and BPR on the value of land and buildings cannot be overemphasised. If the reliefs are available at 100%, then essentially the value of the land and buildings will be free of Inheritance Tax on death.
Alternatively, consider a farm which includes 40 acres (£5,000 per acre) used for horses and a number of farm buildings used for the DIY livery. Given the rise in land and farm steading prices, the value of the land could easily be £200,000 and the buildings (which let us imagine have some development potential) could be valued at £400,000. If no relief applies, and the estate is chargeable to Inheritance Tax, the tax on these assets would be £240,000.
But the damage caused by the Trojan horse does not stop there. If the horses, land and buildings are owned as part of the business, you may find that the total business fails to qualify for any BPR. This is because BPR looks at the dominant activity of the business by reference to such things as profitability, capital employed, turn-over and employee involvement. These Trojan horses may contribute to establishing that in HMRC’s view, this business is not a predominantly trading activity. If this is the case, then the total value of the business fails to qualify for BPR.
In summary, horses can cause real problems when claiming relief from Inheritance Tax. It is important to understand the view of HMRC and the tests which are applied in determining whether or not horses are eligible for relief.
For further information or advice, contact Alison Hall on 0191 232 8345 or by email: firstname.lastname@example.org