Deeds of covenant
What is a deed of covenant?
A deed of covenant is a written legal agreement for one person to pay another an amount without getting any benefit in return.
The person who
- Makes the payment is called a covenantor
- Gets the payment is called a covenantee
You can agree to pay any amount of money under the deed. However, only certain covenants qualify for tax relief.
What covenants qualify for tax relief?
You can claim tax relief on a covenant to:
- An adult who is permanently incapacitated
- A minor who is permanently incapacitated but is not your child
- Someone aged over 65 (this relief is limited to 5% of your total income)
The exact tax saving depends on the:
- Amount of tax paid by the covenantor
- Amount of the income of the covenantee
To receive tax relief, a deed of covenant must last more than 6 years. Revenue recommends that you make a covenant that lasts at least 7 years.
How to make a deed of covenant
You can make a covenant by completing the Deed of Covenant Form for Individuals (pdf). You can also ask a professional adviser such as a solicitor or accountant to make a deed.
The deed must be properly drawn up, signed, witnessed, sealed and delivered to the covenantee.
If you are the covenantee, you must have a PPS number.
If you are the covenantor, you must not get any benefit (either directly or indirectly) in return for paying the agreed amount.
A deed must last for more than 6 years. It is only effective from the date it is made and cannot be backdated.
How to make a payment under a deed of covenant
You must make the deed before you make any payments. You should make sure that you are able to make all payments before the deed ends.
Payments must be paid on the dates that are set out in the deed and for the amount specified. You cannot change the amount or frequency of payments during the period of the deed.
If you are the covenantor, you must complete Form R185 - Certificate of Income Tax Deducted and deduct tax at the standard rate each time you make a payment.
What is the tax relief on a deed of covenant?
If you make a payment under a deed of covenant, you deduct tax on the payment at the standard rate of 20% and send it Revenue.
The tax relief you get depends on your income and whether you pay the standard 20% rate of income tax or the higher 40% rate of income tax.
If you only pay the 20% rate of tax on your income, then there is no difference between your 20% income tax and the 20% you deducted from the payment. This means there is no benefit of tax relief.
If you pay the higher 40% rate of tax on your income, the tax relief you get is the difference between the 40% you usually pay and the 20% you deducted from the payment. So, you can get tax relief of 20%.
If you get a payment under a deed of covenant, tax has been deducted at 20%. If you have total income below the limit for paying income tax, you can have this refunded to you. Your total income includes the covenant payments you get plus any other source of income.
How to claim tax relief
If you are the covenantor
If you are the covenantor, the first time you claim relief you have to send Revenue:
- A copy of the deed of covenant
- A completed Form R185 (pdf)
For following years, complete Form R185 after each payment date and send it to your Revenue office.
If you are a PAYE employee, you can either:
- Claim the relief online by using myAccount to make a tax return or
- Complete the Claim form for Deed of Covenant (pdf) and send it to your Revenue office
If you are self-assessed you can claim relief when you submit your annual tax return.
If you are the covenantee
If you are the covenantee, you must make sure you are registered for tax. You will need to declare your covenant payments to Revenue. In the first year you should send Revenue:
- A completed Claim Form for Deed of Covenant (pdf)
- The original deed of covenant
- A completed Form 54 (pdf)
- The Form R185 that has been completed by the covenantor
- Proof that you have received the payment or payments
For following years, you send Form R185 and the Form 54 to Revenue.