The Chancery Division of the High Court has ruled that publishing royalties paid to a trust settled by the Rev W V Awdry, the author of The Railway Series of books including Thomas the Tank Engine, are trust capital. As a result, the trustees’ addition of them to capital to form the trust fund was confirmed to be correct, as was the tax treatment, namely that they are chargeable to income tax at the basic rate of 20% and not at the trust rate of 45%.

In 1985, the Re Mr Awdry sold his copyrights in the Thomas the Tank Engine series to his publishers in exchange for royalty payments during the unexpired term of the copyrights. Two years later, in 1987, he settled his rights to one half of those royalties on an accumulation and maintenance for his grandchildren. The trustees and the family always understood that the royalties were capital for trust law purposes and so they were added to the trust fund as an when received, and the trustees paid income tax on them at the basic rate. In light of a court decision concerning royalties paid to a trust in respect of Mary Poppins copyrights, the trustees revisited the position, and to resolve any doubt and ensure the correct treatment going forward applied to the High court for a determination whether the royalties were income or capital for trust law purposes. The trustees argued that the receipts were trust capital, whereas the defendants (HMRC and an independent solicitor appointed to represent beneficiaries who might have an interest in arguing they were not capital) argued that the receipts were trust income.

Giving judgment for the trustees, Richards J held that the royalties were capital for trust law purposes because that was the settlor’s intention and because the trust had never owned the underlying asset (i.e. the copyrights) which produced them.

The case has been reported in the Daily Telegraph, The Independent, the Daily Express, the Daily Mail and in the legal press. The full judgment can be found here.

Susannah Meadway acted for the trustees. James MacDougald acted for the representative defendant. James Kirby acted for HMRC.