What are the circumstances whereby a deed of covenant is tax efficient ?
My step father set up a deed of covenant for my children (his step grandchildren) and has gifted the,m money from his already taxed income. Over the years and we have claimed the 20% tax back as it with the HMRC and put it in the gift aided box as told by the accountant. This has always been accepted and paid byt HMRC but in 2019-2020, the tax was paid back on one daughter's account but not on the other. HMRC told me we couldn't do this? My accountant believes we can and we have been doing so for many years . Should we now stop?
Answer
Answered: 02 February 2023
A Deed of Covenant provides a means of making tax efficient lifetime gifts and, crucially, a way of ensuring those gifts can continue to be made even in the event of the Donor losing the capacity to make the gifts themselves. Under Section 21 Inheritance Tax Act 1984, an individual can make a gift that is exempt from inheritance tax provided it can be shown that:
1. It forms part of the Donor’s normal expenditure(i.e. as part of a regular pattern of giving).
2. It is made out of income.
3. It leaves the Donor with enough income forthem to maintain their normal standard of living.
An individual can take advantage of this valuableexemption while they have the capacity to calculatetheir surplus income and gift it.
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