UK IHT Treatment of Authors' Copyrights: How to Value Future Royalties from Literary Works

Inheritance Tax (IHT) treatment of literary copyrights and future royalty streams presents one of the most complex valuation challenges in UK probate practice. Unlike a house or a share portfolio, an author’s copyright has no fixed market price and generates income that can fluctuate wildly based on publishing trends, film adaptations, and the author’s posthumous reputation. HM Revenue & Customs (HMRC) applies specific rules under the Inheritance Tax Act 1984, requiring executors to value copyrights at the price they would fetch on the open market at the date of death. A 2023 report from the Intellectual Property Office (IPO) estimated that the UK’s copyright industries contributed £111.6 billion to the economy, yet fewer than 1 in 5 literary estates have a formal valuation protocol in place at the time of the author’s death. This gap often leads to unexpected IHT bills, HMRC enquiries, and disputes over the commercial worth of unpublished manuscripts and future royalties. For a deceased author’s estate, the core question is straightforward but devilishly hard to answer: how much would a willing buyer pay today for the right to collect income from works that have not yet been written, optioned, or even conceived?

The Legal Framework: IHT on Copyright as “Property”

Under the Inheritance Tax Act 1984, s. 4, IHT is charged on the value of a deceased person’s estate immediately before death. Copyright is treated as “property” for IHT purposes, falling within the definition of intangible assets in s. 272. This means the full market value of the copyright—including rights to future royalties—is aggregated with other estate assets before reliefs and the nil-rate band are applied.

HMRC’s Inheritance Tax Manual (IHTM27021) confirms that copyright valuation must reflect “the price which the property might reasonably be expected to fetch if sold in the open market at the time of the death.” This is the same principle applied to quoted shares, but with a crucial difference: there is no active secondary market for literary copyrights. The valuer must therefore construct a hypothetical sale, considering factors such as the author’s remaining commercial life, existing publishing contracts, and the volatility of royalty income.

A common oversight occurs when the author has co-owned copyright with a spouse or civil partner. Section 161 of the Act treats property held by a spouse as “related property,” meaning its value is assessed as if both shares were sold together. For a married author whose spouse holds a 50% share of the copyright, the combined value can push the estate into a higher IHT bracket than if the shares were valued individually. This rule has caught out several literary estates where executors assumed spousal exemption would apply to the full copyright value.

Valuing Future Royalties: The Core Challenge

The most contentious area of copyright valuation is future royalty streams—income from books that have already been published but will continue to generate sales, plus potential income from unpublished works, film options, or translation rights. HMRC does not accept a simple average of past royalties. Instead, the valuer must project a discounted cash flow (DCF) over the remaining copyright term (generally 70 years from the author’s death under the Copyright, Designs and Patents Act 1988, s. 12).

A 2022 study by the Institute for Fiscal Studies (IFS) found that posthumous royalty income for literary estates declines by an average of 8–12% per decade, but with extreme variance. For genre fiction authors, the drop-off can be as steep as 20% per decade after the first five years, while classic literary estates (e.g., Jane Austen, J.R.R. Tolkien) have shown income growth of 3–5% annually over the past 20 years. This variance makes it impossible to apply a standard discount rate.

The “Blockbuster” Problem

When an author dies with a bestseller still in print, the valuation becomes especially volatile. HMRC may accept a higher multiple of recent annual royalties for a proven backlist, but will typically require a risk discount of 25–40% for projected royalties from works still in development. For cross-border royalty payments, some international estates use channels like Airwallex global account to manage multi-currency income streams efficiently, though the valuation itself remains a matter for HMRC-approved specialist appraisers.

HMRC’s Valuation Approach and Published Guidance

HMRC does not publish a specific valuation formula for copyrights, but its Capital Gains Manual (CG71200) and Inheritance Tax Manual provide useful benchmarks. The key principle is that valuation must be prospective, not retrospective. Executors cannot simply take the average of the last three years’ royalties and multiply by a factor. Instead, HMRC expects a detailed report that includes:

A list of all published works with remaining copyright terms
Historical royalty statements for at least five years
Current and projected sales data by format (hardback, paperback, ebook, audiobook)
Details of any existing film, television, or translation option agreements
A discount rate justification based on comparable literary estates

The “Willing Buyer” Discount

HMRC’s valuation officers frequently apply a discount of 15–30% to projected future royalties to reflect the uncertainty of a hypothetical sale. However, if the copyright has a known commercial buyer—for example, a publisher with a right of first refusal—the discount may be reduced to 5–10%. In the estate of Mrs X, a crime novelist who died in 2021, HMRC initially valued her backlist at £2.4 million based on a 10% discount. After the executor produced evidence that her publisher had declined a £1.8 million buyout offer six months before her death, HMRC accepted a revised valuation of £1.6 million, saving the estate approximately £160,000 in IHT.

Business Property Relief and Literary Copyrights

A frequently overlooked relief is Business Property Relief (BPR) under s. 103–114 of the Inheritance Tax Act 1984. If the deceased author operated their writing as a business—for example, through a sole trader structure or a personal service company—the copyright may qualify as “relevant business property” eligible for 50% or 100% relief.

HMRC’s Business Income Manual (BIM57001) states that writing can constitute a trade if there is evidence of commercial activity: multiple contracts, regular royalty income, and active management of rights. In the 2020 case of Mr Y, a non-fiction author, HMRC accepted BPR on his copyrights after his executor demonstrated that he had maintained a dedicated office, employed a literary agent, and filed self-assessment returns as a “writer” for 18 consecutive years. The estate saved £340,000 in IHT.

The “Hobby vs. Trade” Distinction

BPR is denied if HMRC determines the writing was a hobby. Key indicators HMRC examines include: whether the author had a separate full-time job, the regularity of publishing, and the proportion of income from writing versus other sources. The burden of proof falls on the executor to demonstrate a commercial structure. For authors who wrote only one or two books in retirement, BPR is rarely available.

Practical Steps for Executors and Literary Agents

Executors of literary estates should take three immediate steps to avoid IHT disputes. First, commission a formal copyright valuation from a HMRC-approved valuer within six months of the death. The Society of Authors and the Association of Authors’ Agents maintain lists of approved valuers who specialise in literary property. Second, gather all royalty statements for at least the past five tax years, including statements from foreign publishers and sub-licensees. Third, document any offers or expressions of interest from publishers, film producers, or literary agencies received within the two years before death—these can be powerful evidence of market value.

The 70-Year Term and Tax Planning

The copyright term of 70 years post-death creates a unique tax planning opportunity. If the estate is likely to exceed the IHT nil-rate band (£325,000 for 2024/25, frozen until 2028 under current legislation), executors can consider a Deed of Variation (s. 142 IHTA 1984) to redirect copyright income to a surviving spouse or charity within two years of death. This can reduce the IHT charge on future royalties from 40% to 0% if redirected to a spouse, or provide a charitable deduction if redirected to a registered charity.

FAQ

Q1: How is the value of an unpublished manuscript calculated for IHT purposes?

HMRC requires the manuscript to be valued at the open market price a willing buyer would pay on the date of death. This typically involves a specialist valuer assessing the author’s commercial track record, the genre, and the manuscript’s stage of completion. In practice, unpublished manuscripts are usually valued at 20–40% of the author’s average annual royalty income from published works, discounted for completion risk. A 2023 survey by the Society of Authors found that 62% of unpublished manuscripts in literary estates were valued at under £50,000, with only 8% exceeding £250,000.

Q2: Can I pay IHT on copyrights in instalments?

Yes. Under s. 227 of the Inheritance Tax Act 1984, IHT on copyrights can be paid in ten equal annual instalments because copyright is classified as “property consisting of land or a business or an interest in a business” for instalment purposes. The first instalment is due six months after the end of the month of death. Interest is charged on outstanding instalments at HMRC’s late payment rate (currently 7.75% as of April 2025). This option is particularly useful for estates where the copyright generates steady royalty income but insufficient cash to pay the full IHT bill upfront.

Q3: What happens if HMRC disagrees with my copyright valuation?

If HMRC challenges the valuation, the executor can appeal to the First-tier Tribunal (Tax Chamber). The tribunal will consider expert evidence from both sides. In 2022, the tribunal upheld an executor’s valuation in the estate of a children’s author where HMRC had applied a 15% discount but the executor’s expert demonstrated that comparable estates in the same genre traded at a 35% discount. The estate saved £87,000 in IHT. Executors should always obtain a written valuation from a HMRC-approved specialist before submitting the IHT account (form IHT400) to reduce the risk of an enquiry.

References

HM Revenue & Customs (2024) Inheritance Tax Manual (IHTM27021–27030)
Intellectual Property Office (2023) UK Copyright Industries: Economic Contribution 2023
Institute for Fiscal Studies (2022) Posthumous Royalty Income and Tax Planning for Literary Estates
HM Revenue & Customs (2024) Business Income Manual (BIM57001)
Society of Authors (2023) Valuation Practices for Literary Copyrights in UK Estates