Grandchildren of Rev Wilbert Awdry, the creator of Thomas the Tank Engine, have successfully avoided a substantial tax liability following a legal challenge by HM Revenue and Customs (HMRC). The dispute centered on the treatment of multi-million-pound royalties from the beloved Railways Series, which includes Thomas, originally written to entertain Awdry’s son Christopher during a bout of measles in 1945.

The stories, which evolved into a major children’s franchise encompassing television shows, films, toys, and theme parks, reportedly generated an annual turnover of £750 million by 2011, along with profits exceeding £35 million. Awdry, who completed 26 books in the franchise before ceasing in 1972, passed away in 1997. The rights to Thomas and other children’s characters such as Fireman Sam were acquired by US toy company Mattel in 2011, when it purchased HiT Entertainment for £426 million.

The dispute arose nearly three decades after Awdry’s death, involving the management of a trust established to benefit his seven grandchildren, the children of his three offspring — Christopher, Veronica, and Hilary. Half of the royalty payments, secured through a settlement in 1987, were held in the trust for grandchildren then aged six to 17.

HMRC argued that the royalties received under the trust should be classified as income under trust law, potentially subjecting them to income tax rates up to 45%. However, Mr Justice Richards disagreed, ruling that the royalties constituted capital rather than income. The judge explained that the royalties are best understood as the “fruit” of copyrights which are not themselves assets of the trust. Though acknowledging an alternative interpretation—that the royalties could be seen as income generated by an asset belonging to the trust—the court found no legal basis to override the clear intentions set out in the trust settlement.

The ruling means the grandchildren’s share of the Thomas the Tank Engine royalties remains largely protected from the higher rates of income tax that HMRC sought to impose. Awdry’s longstanding arrangement ensured that while he transferred copyright ownership to publishers in 1985, he retained guaranteed royalty payments, which eventually formed the trust benefiting his descendants.

This case highlights the complexities of intellectual property rights, trust law, and taxation, particularly involving enduring literary estates with significant commercial value.