Deeds of Covenant to Incapacitated Persons

myshirt

Just trying to get my head right around this if anyone has any input.

Scenario

• Guy earns €70k
• Willing to enter a 7 year Deed of Covenant in favour of incapacitated mother
• Payment amount to be €10k per year
• Guy pays tax at marginal rate between €60-€70k
• Mothers income (including income under the covenant) will be covered by tax credits

From a tax perspective:
1. Is the guy getting full tax relief on his payment to his mother?
2. Is the mother receiving the full €10k?

From a cashflow perspective:
1. What way does it work for a PAYE earner?
2. What way does it work for the covenantee (mother)?

Is there any cashflow disadvantage is what I am saying really. I know a mate invested in EIIS in the past and didn't come off so well as he was waiting on RICT certs to issue. They took so long to get off the company that he actually had to pay the tax, and then go about claiming it back. Incidentally, as it happened, tax relief was actually withdrawn from the project and he had to return the money to the Collector General! A real disaster....

In any event, I digress.

howardmarks

myshirt wrote: »

Just trying to get my head right around this if anyone has any input.

Scenario

• Guy earns €70k
• Willing to enter a 7 year Deed of Covenant in favour of incapacitated mother
• Payment amount to be €10k per year
• Guy pays tax at marginal rate between €60-€70k
• Mothers income (including income under the covenant) will be covered by tax credits

From a tax perspective:
1. Is the guy getting full tax relief on his payment to his mother?
2. Is the mother receiving the full €10k?

From a cashflow perspective:
1. What way does it work for a PAYE earner?
2. What way does it work for the covenantee (mother)?

Is there any cashflow disadvantage is what I am saying really. I know a mate invested in EIIS in the past and didn't come off so well as he was waiting on RICT certs to issue. They took so long to get off the company that he actually had to pay the tax, and then go about claiming it back. Incidentally, as it happened, tax relief was actually withdrawn from the project and he had to return the money to the Collector General! A real disaster....

In any event, I digress.

What tax savings arise under a Deed of Covenant?
The exact tax saving depends on the amount of tax paid by the covenantor and on the amount of the covenantee’s income, if any.
If the Covenantor is liable to tax at the higher rate he or she will receive tax relief at the difference between the standard rate and the higher rate
There is no tax benefit to a covenantor who pays tax at the standard rate only
A covenantee whose total income (including the income received under the deed of covenant) is less than the exemption limit qualifies for a refund of the standard rate of tax deducted by the covenantor

http://www.revenue.ie/en/tax/it/leaflets/it7.html

howardmarks

Comparing RICT and deed of covenants is wrong. One is relief for a business investment and the other relief for providing for a family member.
Deed of covenants relief has been around a long long time and is pretty straightforward once all the necessary parts are in place.

myshirt

howardmarks wrote: »

What tax savings arise under a Deed of Covenant?
The exact tax saving depends on the amount of tax paid by the covenantor and on the amount of the covenantee’s income, if any.
If the Covenantor is liable to tax at the higher rate he or she will receive tax relief at the difference between the standard rate and the higher rate
There is no tax benefit to a covenantor who pays tax at the standard rate only
A covenantee whose total income (including the income received under the deed of covenant) is less than the exemption limit qualifies for a refund of the standard rate of tax deducted by the covenantor

http://www.revenue.ie/en/tax/it/leaflets/it7.html

Part in bold there...

But there is a tax benefit to your mother. In other words, say the deal was for €5k, it would go like this (as I see it)
1. You pay your taxes as normal
2. End of year comes. You pay your mother €4k by cheque (net amount of covenant)
2. She claims back the €1k you paid in tax on the €5k income (20% x €5k), to bring her up to the gross amount under the covenant.

Net result - €1k which would otherwise be in the taxman's arse pocket, now finds it's way back to your mother.

No??

myshirt

howardmarks wrote: »

Comparing RICT and deed of covenants is wrong. One is relief for a business investment and the other relief for providing for a family member.
Deed of covenants relief has been around a long long time and is pretty straightforward once all the necessary parts are in place.

Howardmarks - I am just making the point that when you have to pay something first and then reclaim it, it can be a disincentive. It is a general point. There is no comparison. Though the point is this, and it applies to any relief: I'd much rather in any tax relief scenario that the money never finds its way to Revenue, as it can be hard to get it back.

For me at least, cashflow implications have to be considered when thinking about any relief. If you want to do comparisons, compare Film Relief to EIIS and you'll get what I am on about.

howardmarks

myshirt wrote: »

Part in bold there...

But there is a tax benefit to your mother. In other words, say the deal was for €5k, it would go like this (as I see it)
1. You pay your taxes as normal
2. End of year comes. You pay your mother €4k by cheque (net amount of covenant)
2. She claims back the €1k you paid in tax on the €5k income (20% x €5k), to bring her up to the gross amount under the covenant.

Net result - €1k which would otherwise be in the taxman's arse pocket, now finds it's way back to your mother.

No??

The individual making the payment deducts the tax from the covenant and pays the tax to revenue and the net amount to the parent.
The mother if entitled to based on her income reclaims this from revenue.
# at this point there is currently no gain to either individual or revenue. What I mean is the parent will have received all the money the child has given. Net from son, tax deducted from revenue.
NEXT
The person making the payment gets relief on the payment made if they pay tax at the higher rate which based on figures provided would suggest this is so
This is where the tax benefit arises for making the covenant

Even when typed out like this it seems convoluted but hey that's tax for you

howardmarks

myshirt wrote: »

Howardmarks - I am just making the point that when you have to pay something first and then reclaim it, it can be a disincentive. It is a general point. There is no comparison. Though the point is this, and it applies to any relief: I'd much rather in any tax relief scenario that the money never finds its way to Revenue, as it can be hard to get it back.

For me at least, cashflow implications have to be considered when thinking about any relief. If you want to do comparisons, compare Film Relief to EIIS and you'll get what I am on about.

My sole point on this is one is a benefit to a person who is in need and social in nature.
The other is a calculated business investment.
Apples and oranges in comparison

myshirt

howardmarks wrote: »

My sole point on this is one is a benefit to a person who is in need and social in nature.
The other is a calculated business investment.
Apples and oranges in comparison

I am not making a comparison at all. My point is about cashflow implications of something; not about a comparison. What the hell are you reading?

howardmarks

myshirt wrote: »

I am not making a comparison at all. My point is about cashflow implications of something; not about a comparison. What the hell are you reading?

Ah it was late. Maybe I misread. Either way I hope I've answered your real query satisfactorily.