Tax and Mary Poppins Tax Treatment of Royalties The recent case of PL Travers Will Trust v Revenue & Customs Commissioners has lifted the umbrella on the tax and trust law treatment of royalties.
Tax and Mary Poppins Tax Treatment of Royalties The recent case of PL Travers Will Trust v Revenue & Customs Commissioners has lifted the umbrella on the tax and trust law treatment of royalties. The case concerned royalties received by the trust in respect of a stage musical based on the Marry Poppins books. In 1994 the author of the Mary Poppins books agreed a licence to enable a company to produce a stage musical based on the books. The author died before the musical was staged, leaving her literary estate in trust with instructions to pay income to certain beneficiaries for 80 years and then to distribute the capital to selected beneficiaries. In 2004 the trustees amended the 1994 agreement and assigned the right to stage the musical in exchange for royalties. The trustees treated the royalties as capital for tax purposes. HMRC took the view that the royalties should be taxed as income. A line of Scottish cases approved by the House of Lords were cited, mainly relating to mineral rights. These held that where an existing mine was put into trust the receipts were income and payable to the life tenant. Where however the trustees opened new mines or granted new rights the receipts were capital for the benefit of the remaindermen. In the Travers case the royalties under the 2004 agreement were therefore not income. In contrast receipts prior to the 2004 agreement were income. In many cases the tax treatment and trust law treatment of royalties differ. Until recently mineral royalties were taxed 50% as income and 50% as capital. For trust law the treatment depends on the nature of the assets put into trust, as above. However with effect from 6 April 2013 for tax purposes, capital treatment has been removed and the receipts are all to be taxed as income. For discretionary trusts and also for life interest trusts where beneficiaries are subject to higher rate income tax this will mean a significant increase in tax from 28% to 40% or 45%. For more information, please contact Eric Wardle on 01604 233233 or click here to email Ericwardle@hewitsons.com