Dáil Éireann díospóireacht -
Tuesday, 18 Feb 1997

Vol. 475 No. 1

Written Answers. - Covenant Tax Relief.

Eric J. Byrne

Ceist:

111 Mr. E. Byrne asked the Minister for Finance the limits which apply for 1996-1997 and 1997-1998 in respect of covenanting for a parent over 66 years of age; whether tax relief available is at the standard rate or the marginal rate; the person to whom the tax relief accrues; and if a person covenants £1,000 to an elderly parent whether this increase is taxable for the parent and whether the person is credited with this amount as an additional tax-free allowance in the relevant year. [4452/97]

Minister for Finance (Mr. Quinn)

I am informed by the Revenue Commissioners that any amount can be paid under a deed of covenant but there are restrictions on the amount that will qualify for tax relief. The amount of a covenant which qualifies for tax relief is treated as a disposition of the income of the person making the payment, i.e. it is treated not as part of the covenantor's income but becomes the income of the recipient of the covenant.

In relation to covenants made by taxpayers in favour of their elderly parents, the position for 1996-97 and subsequent years is as follows.

Covenants to individuals aged 65 years or over qualify for tax relief to the extent that the amount covenanted does not exceed 5 per cent of the total income of the payer. This restriction includes covenants by children in favour of their elderly parents. However, there is no limit on tax relief for covenants to individuals (including elderly parents) who are permanently incapacitated by reason of mental or physical infirmity.

In one sense the tax relief accrues only to the payer of the covenant, i.e. the child. The child's income for tax purposes is reduced by the amount of the covenant that is tax relieved. The amount of the covenant tax relieved becomes income of the parent. The child deducts tax at the standard rate from the payment and accounts to the Revenue Commissioners for this tax. If the total income of the parent is below his or her exemption limit or is less than his or her personal allowances, the parent is entitled to reclaim the tax deducted from his or her income. It is in this sense that benefit accrues partly to the parent.

Take for example a person whose total income in 1996-97 is £20,000. He or she covenants 5 per cent of his or her income i.e. £10,000 to his or her parent. The child's income for tax purposes is reduced by £1,000. He or she deducts standard rate tax from the payment of £1,000 (£270) and accounts to revenue for the tax. He or she pays £730 to the parent.

If the child is liable to tax on his or her income at the top rate of 48 per cent the saving to him or her is £210 i.e. the different between the £480 tax which would have been paid if the covenant had not been made and the £270 tax deducted from the covenant payment.

The £1,000 become income of the parent. If the parent is not liable to tax in 1996-97, i.e. his or her total income is below his or her exemption limit or is less than his or her personal allowances, he or she is entitled to a refund of the £270 tax accounted for by the child.

Thus, the maximum relief available is 48 per cent of the amount of the covenant and it is apportioned as follows:

	1996-97	1997-98
Parent	27 per cent	26 per cent
Child	21 per cent	22 per cent

If details of the covenant are notified to the Revenue Commissioners in the early part of the tax year for which the covenant is made, the child's tax relief is given by way of an additional tax free allowance. Otherwise relief is given by way of repayment at the end of the tax year.