Deed of Covenant - Query re Mechanics

[Gordon Gekko]

Hi,

Is the following correct based on people’s experiences with Deeds of Covenant:

- I covenant €1k a year to an OAP, so I complete the form, make sure we meet the criteria, etc
- I pay the OAP €800
- I’m deemed to have deducted €200 from the payment, but I don’t actually do anything or pay anything because it was already ‘deducted’ through the PAYE system
- I get a further €200 of tax relief
- If the OAP is below the age exemption limit, they claim €200 back from Revenue
- So for me to give €1k to the OAP, it’s cost me €600

Many thanks,

Gordon

 

[irbx]

Hi,

Is the following correct based on people’s experience with Deeds of Covenant:

- I covenant €1k a year to an OAP, so I complete the form, make sure we meet the criteria, etc
- I pay the OAP €800
- I’m deemed to have deducted €200 from the payment, but I don’t actually do anything or pay anything because it was already ‘deducted’ through the PAYE system
- I get a further €200 of tax relief
- If the OAP is below the age exemption limit, they claim €200 back from Revenue
- So for me to give €1k to the OAP, it’s cost me €600

Many thanks,

Gordon

Been looking at this my self for my parent who only got old age pension .

I believe that is close how it works you get 20% relief on deed from revenue.

But the extra income is taxable on reciever side so it depending on their combined income and tax credits to offset against it to get the full relief. But for old age person on low income it might make sense to top them up this ways. ( same applys for disabled adult as well)

 

[AAAContributor]

I'm looking at this issue too Gordon.

Haven't executed on it yet but the mechanics you describe matches my research.

Here's an old article which confirms a similar situation (€1k covenant to OAP):

What's the most tax efficient way of giving money?

Q I want to give money to my elderly mother and want to do it in the most tax-efficient way possible. A friend of mine told me that the best way to do this is through a deed of covenant. Can you outline how a deed of covenant works?

www.independent.ie

I believe the covenant must be capable of lasting more than six years with no possibility for revocation within that period, so watch out on that point.

 

[Monbretia]

Yes you are roughly right, you pay the amount less 20%, OAP claims back the 20% tax that you have paid assuming they are under the threshold and because the original 1,000 income is deemed never to have been yours then if you paid tax on that at 40% then you get an additional 20% tax credit.

If you are a 20% tax payer then you don't get an additional credit.

It's a very efficient system if it suits you, did it for years for my father from 3 of us. The covenant must be put in place for more than 6 yrs so usually it's a 7 yr one but to the best of my knowledge it can be cancelled early on agreement by both parties if necessary.

 

[Duke of Marmalade]

Yep, that's the way it worked. Did it myself for many years. Make it open ended. It's amazing how quick the 7 years go by and suddenly you forget to renew it and maybe keep claiming relief on false pretences.
Mechanics really easy. Download forms. Need to have covenant witnessed. I recommend bank transfer or standing order for ease of verification. I was never asked to verify.

 

[Duke of Marmalade]

The covenant must be put in place for more than 6 yrs so usually it's a 7 yr one but to the best of my knowledge it can be cancelled early on agreement by both parties if necessary.

Or just stop paying. I cannot envisage the recipient suing for breach of covenant.
I attach the full kit.
Deed of Covenant (provided by Revenue)
Form R185 just a confirmation, I never had cause to produce one
Form 54 this is the necessary final step for the recipient to claim back the 20% deducted at source

 

[ArthurMcB]

Can i check the following re DoC:

1. Can the total income, of which tax relief is restricted to 5%, include rental income or is it just salary?

2. When calculating the 5%, is it of total income in current year or previous yr?

3. If total income is projected to be less going fwd does this mean that the covenanted amount should reflect this - given that it must be for 7 years and cannot change?

Thanks.