A client inherited rights to music royalties from his mother. How will this be taxed, and will he be able to use the trading allowance of £1,000 against any receipt?
Unfortunately, it appears the trading allowance will not be due.
The trading allowance was introduced from the 2017/18 tax year for individuals and can be used against either relevant trading income, or certain miscellaneous income.
As our client was not the composer the royalties will not arise from their profession and so will not be trading income. The receipt of royalties by our client will be taxed as a miscellaneous income if they cannot otherwise be treated as trading income.
The relevant trading income of an individual for a tax year is income from a trade that is not carried on in partnership and is not rent-a-room income for the tax year.
Miscellaneous income for a tax year, for the purposes of the trading allowance, is all the income arising to the individual in the tax year which would be chargeable to income tax (income not otherwise charged).
As royalties are charged to tax as miscellaneous income under a different Chapter of regulations, the trading allowance cannot be used against them.
Basic information on the trading allowance can be found here