Thomas the Tank Engine Creator's Grandchildren Win Multimillion-Pound Tax Battle
The High Court ruled that royalties from the beloved children's series should be treated as capital, not income, significantly reducing the tax owed by a trust set up for the creator's seven grandchildren.
The grandchildren of the Rev. Wilbert Awdry, creator of the "Thomas the Tank Engine" series, have successfully challenged the U.K.'s tax authority, His Majesty's Revenue and Customs (HMRC), in a High Court battle over multimillion-pound royalties. The trust established by Awdry to manage the inheritance for his seven grandchildren argued that royalties should be classified as capital, a designation that incurs a substantially lower tax rate compared to income.
The dispute centered on how royalties generated by the enduringly popular children's books, which have spawned a global franchise including television series, films, toys, and theme parks, should be taxed. The "Railway Series" books, created by Awdry during World War II, became a worldwide phenomenon, with the franchise now reportedly turning over more than a billion pounds annually.
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Awdry, an Anglican clergyman and railway enthusiast, began writing the stories to entertain his young son Christopher while he was ill. He established a trust in 1987, two years after a deal that provided him with ongoing royalties but transferred copyright ownership to his publicist. Under the trust's terms, half of all royalties were to be placed into the trust for his seven grandchildren, who ranged in age from six to 17 at the time.
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The trust stipulated that each grandchild would be entitled to their full share of the capital upon reaching the age of 45. Until then, they could only receive income generated from the investment of the royalties. After all seven grandchildren had passed the age of 45, a disagreement arose with HMRC regarding the tax liability.
HMRC's position was that the grandchildren were already entitled to receive royalties as income, and thus, little would change for tax purposes once they reached 45. However, the High Court judge found this interpretation less plausible.
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Mr. Justice Richards ruled that the royalties themselves constituted the assets of the trust, classifying them as capital. He employed the analogy of a tree representing capital and its fruit representing income generated by that capital. The judge concluded that it was more realistic to view the royalties as the "fruit" of the copyrights in the "Railway Series," and therefore, capital for trust law purposes. This decision spares the grandchildren from a potentially significant tax burden.
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A spokesperson for HMRC indicated that the department is reviewing the court's decision and considering its next steps.