Over the years the horse racing industry has become a huge industry in the UK. Spectators continue to throng the courses across the country, making it the second most watched sport after football.

According to a report compiled by accountancy firm Deloitte, the industry had an economic impact of £3.4 billion last year. Its role as a major employer in rural areas and as a tax-generating industry has helped prevent any large scale interference from successive governments.

Indeed there are dedicated parliamentary groups for MPs interested in the horse and bloodstock communities. It is no surprise that horseracing is known as ‘the sport of kings’, having historically been the preserve of the nobility. The sport has, in more modern times, become tied to a newer generation of wealthy owners.

However, the Deloitte report picked up on a main point for many racehorse enthusiasts: ‘Owning a racehorse in Britain has an element of “aspiration” to it,’ it reports. ‘The continued association of the monarchy with racing is indicative of the relatively high social standing that the sport commands.’

Seemingly, participation in the ownership of racehorses has been an expensive process, out of the reach of investors with more modest pots of money to invest in. However, in recent years a number of ways for investors to invest in the sport have developed, opening up the sport to investors of all means.

How to get into it
Enterprise investment schemes (EIS) have been one of the main conduits for investment into racehorses and breeding schemes The schemes allow investors to invest tax-efficiently into a range of alternative assets, such as forestry, films and football fees.

Breeding Capital is one such company, offering investors the chance to invest in a portfolio of ‘quality bloodstock assets’ managed by its team of industry professionals.

William Sporborg, managing director at Breeding Capital, says the four products it currently offers to investors are set up to deliver positive returns over a four-year period. It currently has a portfolio of 30 horses.

Sporborg was previously involved in the private equity market during the 1990s, launching the first private equity fund aimed at individuals, before developing a greater interest in tax-efficient funds eventually settling on the bloodstock sector as an area for development.

‘Racehorses are incredibly volatile in valuation, horses can go into the stalls worth £200,000 but at the end of the race might now be worth £1 million or £50,000,’ he says.

‘They have that degree of volatility therefore, you typically want to maximise returns from bloodstock.’ Sporborg says although bloodstock investments are not recession proof, at the higher end of the market there will be a degree of value protection.

‘The reason we see bloodstock as a suitable investment is that the assets have asset backing,’ he says. ‘Whilst talking about racehorses being very volatile, broodmares are less volatile.’

Breeding Capital aims to breed foals from broodmares – which are expected to cost £500,000 on average - annually, with the offspring sold as yearlings.

Among the set-up at Newmarket-based Breeding Capital is bloodstock director Simon Marsh who holds the record of breeding and consigning the horse achieving the highest price ever in a European sales ring for £3.4 million in 2000. Horses and rights to horses are only acquired by Breeding Capital following an inspection by its management team.

Sporborg plans another Breeding Capital EIS for January 2011, with a minimum investment of £10,000, building on the successful closing of his previous funds he says have been oversubscribed. He has also considered a racehorse product, but has yet to test the waters.

‘We don’t have a racing investment product yet, we have been working on one for a number of years but it hasn’t come to fruition for various reasons,’ he explains. ‘You have to get it absolutely right.’

Popularity
The reasons for bloodstock investing also seem compelling, as figures seem to back demand. According to the European Federation of Thoroughbred Breeders’ Associations, during 2008 more than 18,000 horses were sold at public auction.

Yet, John Lynam, a bloodstock economist told attendees at the Thoroughbred Breeders’ Association’s annual seminar earlier this year that there was an ongoing problem with overproduction and the emergence of hobby breeders, reducing value.

It also remains to be seen to what extent bloodstock sales will be affected by any further dip in the market. As investment vehicles, however, Jonathan Gain, chief executive at EIS specialist Stellar Asset Management, is confident the schemes will offer investors good tax benefits.

‘The great thing about an EIS is that has some fantastic tax breaks, the fact that you get 20 per cent income tax relief on the amount you invest, no capital gains tax on the profits you make and you qualify for inheritance tax relief after two years,’ says Gain.

The schemes also offer loss relief, which can be offset against capital gains of up to 48p in the £1 or against capital gains tax and are exempt from inheritance tax after two years.

‘People clearly make money from horses, but I think you have to be a horse lover to want to invest in those types of EIS.’ As far as HM Revenue & Customs (HMRC) is concerned, racehorse ownership is outside the scope of taxation.

Peter Treadgold, director of assurance & business service within Smith & Williamson’s equine and bloodstock division, says there are a number of tax advantages for racehorse owners.

Treadgold says potential owners will not receive tax relief on for training costs, but there are some other sweeteners on offer from the HMRC ‘Ownership of horses is regarded by HMRC as a hobby,’ he explains, ‘but if the horse happens to win any prize money that income is not taxed. If the horse wins a race or two and somebody makes an offer [to buy the horse] that money is also tax-free.’ ‘

Pure racehorse ownership is outside the scope of tax if you just had one horse in training,’ he explains. ‘For one horse sold at a profit there are lots sold at a loss, it’s clearly why HMRC regard it on the balance of probability as a net loss,’ says Treadgold. ‘If they were to give tax relief they would be net givers, which they’re not going to be.’

Success stories
One of the better-known names within the racehorse ownership scene is Highclere Thoroughbred Racing. The syndicate maker recently had a winner at Ascot in the prestigious King George VI and Queen Elizabeth Stakes, after one of its horses, Harbinger beat all expectations to take the top prize.

Demonstrating the continuing popularity of horseracing, the British Horseracing Authority (BHA) reported that 9,628 races took place in Great Britain during 2009, with almost 96,000 participants.

There are a number of horse ownership schemes and syndicates available for investors wishing to get involved in racehorse ownership. Often the schemes require an initial payment followed by 12-month commitment, offering investors or members the stable visits, owner privileges at meets and a share in any potential prize money.

Yet the popularity of such syndicates and schemes is difficult to ascertain, as the BHA revealed the number of horses owned in partnership or under joint ownership fell more than other types of ownership during 2009, shrinking from 5,689 to 5,316.

And with the most recent recession it remains to be seen whether horse-fanciers will return to the market. Syndicates and ownership schemes might seem a familiar concept for many investment club members for features such as regular investment and the group investment aspect are common themes.

Be warned
However, with little expectation of return on any money invested, it is right that it should be considered more of a hobby.

Gavin Haynes, managing director of Bristol-based independent financial advice firm Whitechurch Securities, says it would recommend investors stick to regulated investment products, such as OEICs or unit trusts. ‘Tax benefits can be attractive, but we are very cautious about investing for tax purposes,’ he says.

‘With something as specific as investing in racehorses or bloodstock investing, you won’t be able to assess the underlying holdings. Our investment policy is that you really need to understand what’s underneath the bonnet’

Patrick Connolly, head of communications at nationwide independent financial advisers AWD Chase de Vere, says the firm wouldn’t recommend the products to clients because of the risk attached to the assets. ‘How do you fit something like that into a diversified portfolio?’ he asks.

‘Investing in horses is a high risk strategy and most people would lose money.’ David Black, who works in the financial services industry, has been a part owner of racehorses for a number of years, but has no illusions about the potential for earning money from ownership.

‘Two out of three horses never win a race, the vast majority of people who come into it might get a bit of money back, but it never pays for itself,’ he warns.

‘It’s a hobby, not an investment.’ Black says he has paid money into syndicates for the ancillary benefits that come with ownership, such as stable visits and entry to the horses paddock area at meets.

‘You pay an amount you can afford,’ he says. ‘You shouldn’t get into it expecting to make a return on what you put in.’