Income tax does not have to be paid to HMRC when owning a racehorse on the basis that it is a hobby and for pleasure.

This means that prize winnings are tax free however, there is no income tax relief available for buying the horse or any of its training costs.

Racehorses tend to cost more in training and in keep than they ever earn in winnings so people are more likely to be paying for the cost from their main earnings that have already been taxed.

Robert Pullen, personal tax manager at Blick Rothenberg said: ‘There would have to be overwhelming evidence that the activity is being undertaken on a commercial basis with a view to profit for HMRC to contemplate allowing relief for losses (and taxing earnings).

‘This can be achieved if there are modest costs associated with a business brand name or there is a heavy focus on advertising, for example, but this is rare’.

Racehorses are also exempt from capital gains tax this is because they are viewed as ‘wasting chattels’ meaning they are assets with a useful life of under 50 years.

There is no loss relief due to this however, if a horse is a huge winner for example  Frankel or Kauto Star and sold for breeding at a huge profit, no tax is payable.

Pullen said: ‘Operating the horseracing activity through a company could result in the investor ultimately realising a loss on the shares in the company.

‘Whilst there is a possibility the loss could be allowable to offset against other capital gains the investor has made, any claim would likely be heavily scrutinised by HMRC particularly if they can show the company was formed partly to cushion any loss with a tax break’.

It is also important to distinguish between owning and breeding a racehorse. Breeding requires capital investment over 20 years and these activities are taxable and initial costs can be claimed for tax purposes.