Understanding royalty income: sources, exploitation and inheritance

In today’s creative and intellectual economy, royalty income is crucial in monetising intellectual property (IP) for musicians, authors, inventors, influencers and brand ambassadors, providing a recurring stream of passive income.

But where do royalties come from? How can they be optimised? And what happens to royalty rights after death?

This article explores the types of royalties, ways to exploit them commercially and the legal implications of inheriting royalty streams.

What is royalty income?

A royalty is a payment made to an individual or entity for the right to use intellectual property they own. The IP holder retains ownership but licenses others to use it in exchange for periodic compensation, usually based on sales, performance or use.

Royalty payments may be contractual, statutory or negotiated individually. They can be fixed fees, percentage-based or even tied to complex commercial metrics.

Recording royalties

Recording royalties, also called mechanical royalties, are paid to artists, producers and songwriters when a sound recording is reproduced or sold, including physical CDs, digital downloads and streaming platforms.

Performing artists are paid by their record label; songwriters and composers are paid via collection societies; and producers may receive points on sales or royalties negotiated in production contracts.

Streaming royalties

Streaming services pay micro-royalties each time a song is played. Though individually small, these can accumulate into substantial income over time.

Performing royalties

Artists and bands earn performing royalties, also known as public performance royalties, when their music is played on the radio or TV, streamed in public spaces or performed live – even by other artists.

In the UK, PRS for Music collects performance royalties for songwriters and composers. In the US, this role is handled by organisations like ASCAP, BMI and SESAC.

Merchandising royalties

Merchandising royalties are paid when a brand, image or character is used on consumer products, common in music, entertainment, sports and film and TV franchises.

Royalties are usually a percentage of wholesale or retail sales and governed by licensing agreements between the rights holder (artist or brand) and the licensee (manufacturer or distributor).

Endorsement royalties

Endorsement royalties arise when a celebrity, influencer or expert lends their name or likeness to products like perfume lines, services such as fitness plans or media campaigns.

These may be structured as flat fees, commissions or revenue shares or performance bonuses.

Influencer royalties

Social media influencers, especially on platforms like TikTok, YouTube and Instagram, are now key players in endorsement-based royalties through sponsored content and affiliate arrangements.

Publishing royalties

These royalties are paid to authors, scriptwriters or publishers when their written content is sold, reprinted or adapted. This includes book sales, licensing for film or TV adaptations and use in anthologies or translations

A novelist may earn royalties from bookstore sales, audiobook licensing or streaming rights if their work is adapted.

Software and patent royalties

Inventors or developers earn royalties when their patents or software code is licensed to third parties. This includes Software as a Service (SaaS) licenses, embedded code in commercial products and pharmaceutical patents, especially during exclusivity periods.

These are governed by IP license agreements, often structured as either upfront lump sums or ongoing royalties based on units sold or revenue.

Franchise and branding royalties

These royalties are paid for the use of a business model, trade name and system, such as in franchising. McDonald’s and Subway, for instance, collect royalties from franchisees.

Franchise royalties may be a flat monthly fee, percentage of gross turnover or a combination of both.

How can people monetise or exploit royalty rights?

Owning royalty rights opens up multiple ways to generate or accelerate income:

1. Direct use and licensing

Creators can license their IP for use by third parties in exchange for royalties. For example, artists license songs to films, authors sell foreign translation rights and inventors license patents to manufacturers.

2. Selling royalty streams

Royalty streams can be sold outright or partially assigned to investors. Online platforms like Royalty Exchange or SongVest allow creators to auction future royalty income, which can unlock upfront capital while retaining some future upside.

3. Forming royalty companies or trusts

Artists or inventors may place royalty rights into LLCs, family investment companies or trusts, helping with tax efficiency, succession planning and commercial management.

4. Securitisation

For large-scale rights holders such as music catalogues, royalties can be securitised – bundled and sold to investors as royalty-backed securities.

This has been done by major artists like Bob Dylan and Bruce Springsteen as well as David Bowie, who securitised his royalties before his death by issuing “Bowie Bonds”, allowing him to receive a large sum upfront in exchange for future royalties.

Taxation of royalty income

In the UK, royalty income is taxable under Income Tax or Corporation Tax if earned via a company.

If royalties are considered trading income, they may be subject to Class 4 NICs, while non-cash royalties such as shares and free products are taxed at market value.

If you receive royalties from overseas, you may be taxed both in the UK and the foreign country.

The UK allows double taxation relief under treaties and, as of April 2025, former “non-doms” must report all worldwide royalty income, even if it stays offshore.

What happens to royalties when a rights holder dies?

Most royalty rights are property rights and can be passed on through a will or intestacy.

Song copyrights, patent licensing rights, book publishing contracts and brand and merchandising agreements can all be inherited.

Copyright lasts for 70 years after the death of the author in the UK, EU and US, while patents usually last 20 years from the filing date and can be passed on if still active.

Trademarks can be indefinitely renewed, making them valuable legacy assets.

Estate planning

If royalty rights are not properly assigned in a will, they become part of the residuary estate and may be mismanaged.

Royalty rights can be:

• Transferred into family trusts
• Assigned to heirs or companies
• Sold during life with retained income rights.

Royalties form part of the deceased’s estate and executors must value and administer these assets, including ongoing royalty payments.

Future royalty income may also affect Inheritance Tax (IHT) calculations.

When Prince died in 2016 without a will, his estate – largely consisting of music royalties and unreleased works – became the subject of lengthy probate litigation. His heirs now benefit from a catalogue generating millions annually.

Roald Dahl’s estate continues to receive royalties from book sales, adaptations (e.g., Netflix’s acquisition of his catalogue) and merchandising decades after his death.

Royalty income is a powerful financial asset for creators, artists, inventors and influencers. It provides long-term income from the continued use and enjoyment of intellectual property. With the right licensing strategies, tax planning and succession arrangements, individuals can maximise and pass on these valuable rights.

As intellectual property continues to grow in economic importance, managing royalty income strategically has never been more crucial – both in life and after death.