Dáil Éireann díospóireacht -
Thursday, 25 Oct 2001

Vol. 543 No. 1

Written Answers. - Tax Incentives.

Noel Ahern

Ceist:

135 Mr. N. Ahern asked the Minister for Finance the tax incentives which are available if relatives give donations by covenant or gifts to a disabled person who is 40 years old, to enable this person to purchase a new house adapted to his or her needs; and the way in which these covenants or gifts would be treated. [25840/01]

Minister for Finance (Mr. McCreevy)

I am advised by the Revenue Commissioners that the position in relation to gift tax is as follows. Under section 58 of the Capital Acquisitions Act, 1976, the receipt of support and maintenance, in money or money's worth, by a dependent relative, as defined under section 466 of the Taxes Consolidation Act, 1997, of a disponer will not be considered a gift or inheritance in certain circumstances. These are that the support and maintenance is received during the lifetime of the disponer and that the provision of such support or maintenance would be considered part of the normal expenditure of a person in the disponer's circumstances and is reasonable having regard to the disponer's financial position.

Apart from this, it should be noted that, gifts or inheritances received by a person, which in aggregate remain under the relevant tax-free threshold, would not attract capital acquisitions tax. In this case, therefore, and subject to the proviso that the person in question has received no prior gifts or inheritances since 2 December 1988 from disponers in the same group, that is, aunts, uncles, brothers, sisters, he or she could receive an amount up to £31,680, 40,225, from an aunt without incurring a CAT liability.

Furthermore, the Revenue Commissioners have specific powers under section 44 of the Capital Acquisitions Tax Act, 1976, to deal with individual hardship cases and depending on the circumstances, to postpone, remit or compound tax due.

The position regarding donations by way of covenants is as set out below. The taxes legislation provides that where an individual, the covenantor, draws up a deed of covenant in favour of another individual, the covenantee, who is aged 18 years or older and is permanently incapacitated by reason of mental or physical infirmity, or is a minor child, other than a child of the covenantor, who is permanently incapacitated by reason of mental or physical infirmity, or is aged 65 years or over, he or she is entitled to an income tax deduction, at his or her marginal rate of tax, in respect of the payments made under the terms of the deed. He or she must however deduct tax at the standard rate from the gross payments made to the covenantee and account to revenue for the tax so deducted.

The gross payments are taxable in the hands of the covenantee but he or she is entitled to a credit for the standard rate tax deducted from the payments.

To be effective for tax purposes, a deed of covenant must provide for payments to be made for a period capable of exceeding six years. A once off amount of capital gifted by an individual to another individual would not qualify for income tax relief.

It would be possible for an aunt to draw up a deed of covenant in favour of a niece who is permanently incapacitated by reason of physical or mental infirmity. As explained above, the deed would have to provide for payments to be made for a period capable of exceeding six years. The precise tax savings involved would depend on (a) the rate of tax at which the covenantor is liable on her total income from all sources, and (b) the level of the covenantee's income from all sources.

If the covenantor is liable to tax at the higher rate she will receive tax relief on the payments made at the difference between the standard rate of tax and the higher rate of tax. There is no tax benefit to a covenantor who pays tax at the standard rate only.

Regardless of the covenantor's situation, a covenantee whose total income from all sources, including the gross payments received under the deed of covenant, is less than the relevant exemption limit, £3,034, 3,852, for a single person for the tax year 2001, will qualify for a refund of the standard rate tax deducted by the covenantor.