Deeds of covenant
A deed of covenant is a written legal agreement between 2 people where one person agrees to pay the other an amount of money without receiving any benefit in return.
You can agree to pay any amount of money under the deed. However, only certain covenants qualify for tax relief. The deed must be properly drawn up, signed, witnessed, sealed and delivered to the individual receiving the payments.
The person who makes the payment is called a covenantor.
The person receiving the payment is called a covenantee.
Making a deed of covenant
The deed must be properly drawn up, signed, witnessed, sealed and delivered to the covenantee to be legally effective. You can make a deed of payment by completing Revenue’s deed of covenant form (pdf). You can also consult a professional advisor such as a solicitor or accountant to make a deed.
If you are the covenantee, you must have a PPS number to receive payments. If you do not have a PPS number, you should get in touch with your local Department of Social Protection office.
If you are the covenantor, you must not receive any benefit (either directly or indirectly) in return for paying the agreed amount.
A deed is only effective from the date it is made and cannot be backdated. It must also last more than 6 years.
Making a payment under a deed of covenant
You must enter into the deed before you make any payments. You should also 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 that is specified. You cannot change the amount or frequency of payments during the period of the deed.
If you are the covenantor, you must deduct tax at the standard rate (20%) from the total (gross) covenant payment and pay it to Revenue.
If you pay tax under the PAYE system you can account for the tax deducted by having your tax credit certificate amended by Revenue. If you are self-assessed, you should account for the deed of covenant in your annual assessment that you submit to Revenue.
You should complete a Form R185 each time you make a payment to the covenantee.
What covenants qualify for tax relief?
Covenants to particular groups qualify for tax relief:
- Permanently incapacitated minors (children under 18 years of age and unmarried)
- Permanently incapacitated adults
- People over 65 years
You cannot claim tax relief on covenant payments you make to your own permanently incapacitated child. However, tax relief can be claimed on covenants made to permanently incapacitated children by people other than their parents.
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 last more than 6 years. Revenue
recommends that you make a covenant that lasts for a minimum of 7 years.
Rates of tax relief
Unrestricted tax relief can be claimed on covenants you make to permanently incapacitated minors and on covenants you make to permanently incapacitated adults.
When you make a covenant to an adult over 65 years, the relief you receive cannot exceed 5% of your total income (gross income less certain deductions such as expenses, capital allowances and so on).
If you are the covenantor, your relief depends on your rate of tax. Your relief is calculated on the amount of the covenant at the difference between the higher rate (40%) and the standard rate (20%). There is no tax benefit if you pay tax at the standard rate only.
The covenantor may refund the tax deducted to the covenantee where the covenantee’s total income is below the limit for paying tax. Your total income includes the covenant payments you receive plus any other source of income.
How to apply
Tax relief for the covenantor
If you are the covenantor, the first time you make a covenant payment you should send Revenue:
- The original deed of covenant
- A copy of Form R185 (pdf)
For following years, complete Form 185 on or after each payment date and forward it to your nearest tax office.
Tax relief for 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
- The original deed of covenant
- A completed Form 54 (pdf)
- 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.