Covenants and Covenantee

Covenants

If you’re a higher rate taxpayer and you want to support a person on a low income, it may be worthwhile to covenant the money. A covenant is a legally binding written agreement to make regular payments to another person.

There is no limit if the person is permanently incapacitated and covenants are most effective when the recipient doesn’t have any taxable income.

 You can claim relief on covenants made to:

• One or more adults aged 65 or over. The relief you receive is restricted to 5% of your total income
• Permanently incapacitated minors under 18 years of age who are not married or in a civil partnership
• Permanently incapacitated adults

Conditions:

• You must not receive any benefit in return for paying this amount
• A Deed of Covenant must last for more than 6 years to qualify for tax relief
• We recommend you make a covenant that lasts for a minimum of 7 years
• You can't claim tax relief on covenant payments you make to your own incapacitated child

• must not receive any benefit in return for paying this amount
• The deed must be properly drawn up, signed, witnessed, sealed and delivered to the covenantee to be legally effective
• You can't backdate a deed. A deed is only effective from the date it's made
• If you're a beneficiary, you must have a Personal Public Service Number (PPSN) so you can get the payments. If you don't have one, you can apply for a PPSN by contacting your Intreo office
• If you're the covenantor, you must deduct tax at the standard rate (20%) from the payment and pay it to Revenue
• You must give details of the payment and tax deducted on a Form R185 - Certificate of Income Tax deducted to the covenantee each time you make a payment

The amount you covenant may be taxable in the hands of the recipient and it’s important to note that money covenanted to people receiving a non-contributory pension or means-tested allowance may affect their entitlement to the allowance.

You can pay any amount under a Deed of Covenant. However, only certain covenants qualify for tax relief.

To make a Deed of Covenant to another person you must complete the Deed of Covenant Form:

Otherwise, you can ask a professional adviser such as an accountant or a solicitor.

How much tax relief do you get?

If you're the covenantor, your relief depends on your rate of tax.

So if you pay tax at the higher rate (40%), your relief is calculated on the amount of the covenant at the difference between the higher rate of tax and the standard rate (20%).

And if you pay tax at the standard rate only, you don't get any tax relief on your covenant payments.

If you're the covenantee, (e.g. receiving the payment), you may receive a refund of the tax deducted by the covenantor where your total income is below the limit for paying tax. In this case your total income includes the covenant payments and any other source of income.

Documents to send to Revenue

If you're making covenant payments, the first time you claim for relief you need to send to Revenue:

• Copy of the Deed of Covenant
• Copy of Form R185 - Certificate of Income Tax deducted  

For following years, you must complete a Form R185 after each payment date and send a copy of this to your Revenue Office. Revenue will ensure you receive a repayment of tax if it's due.

If you're a PAYE employee, you can submit a Form 12 to claim the relief. Alternatively, you can complete the Claim form for Deed of Covenant and send it into your local Revenue office.

If you're self-assessed, then you should include the details in your annual Form 11 return.

Covenantee

If you're receiving the payments, you should ensure you're registered for tax. If you're not registered, then please see the Starting your first job section here.  This section will explain how you can register for tax.

You need to declare your covenant payments to Revenue. In the first year, you should send:

• A completed Claim Form for the Deed of Covenant
• Original Deed of Covenant
• Completed Form 54 claims
• Completed Form R185 you receive from the covenantor
• Proof you received the payments

For the following years, you need to send Form R185 and Form 54 every year that you receive payments.