SerpApi.Org
Heirs to the Thomas the Tank Engine fortune have won a High Court battle with HMRC over how the royalties from the children’s books should be taxed.
The Rev Wilbert Awdry, who wrote the books that launched the beloved franchise, created a trust almost 40 years ago to outline when his grandchildren would be entitled to the proceeds of the series.
Trustees were at risk of having to pay up to 45pc of the trust’s income to HMRC because of the traditional classification of royalties as income for tax purposes.
However, in a judgment handed down by the High Court, Mr Justice Richards ruled that royalty payments received by the trustees counted as capital rather than income for trust-law purposes, shielding them from potential taxation.
Rev Awdry was an Anglican clergyman who created the Thomas the Tank Engine stories during the Second World War to amuse his son amid an outbreak of measles. The Railway Series books would become a flourishing international franchise, including a long-running television adaptation narrated by Ringo Starr of The Beatles.
The trust was established in 1987, two years after Rev Awdry entered into an agreement with his publisher that entitled him to an ongoing stream of royalties.
Under the terms of the trust, the creator’s seven grandchildren would be transferred half of all the royalties paid to Rev Awdry. They were also entitled to receive income before becoming absolutely entitled to their share of the capital at the age of 45.
The case hinged on a distinction that meant the beneficiaries could only receive the income generated by investing the royalties before turning 45. But on their 45th birthday, they became entitled to their share of the royalties and gained the right to future payments.
HMRC’s interpretation was that “not much would change” when a beneficiary turned 45 because after turning 21 each grandchild would already be entitled to receive one seventh of the royalties as income, according to the court documents.
But the judge found it “much more plausible and obvious” that the settlement intended the age of 45 to mark a watershed.
The judge considered similar cases on the distinction between capital and income, including a 2014 tax tribunal concerning royalties from PL Travers, the author of Mary Poppins.
He identified a vital difference between the beneficiaries of Mary Poppins and Thomas the Tank Engine. Unlike Ms Travers’s estate trustees, Rev Awdry’s trustees never owned the copyrights in the Railway Series, so Thomas the Tank Engine royalties were judged to be “fruit” of those copyrights.
Tim Stovold, head of tax at accountancy firm Moore Kingston Smith, said: “In a highly technical decision, the answer came down to a discussion of fruits and trees.
“The tree is normally the capital and the fruits are the income generated from that capital. In most cases, it is the person who owns the tree who can enjoy the fruits. In this case, Mr Awdry had previously assigned the copyrights to his publisher in return for the royalties – so the trust had an entitlement to the fruit without owning the tree.”
HMRC was contacted for comment.
