A deed of covenant to pay is a legal agreement between two individuals, where one person promises to pay the other a specified amount of money over a period of time, without receiving any benefit in return.
Some people choose to use a Deed of Covenant since in certain circumstances it enjoys tax benefits. This article explains what a deed of covenant to pay is and why it is used.
A deed of covenant to pay is a legal agreement between two individuals, where one person promises to pay the other a specified amount of money over a period of time, without receiving any benefit in return.
Some people choose to use a Deed of Covenant since in certain circumstances it enjoys tax benefits. Find out more below about what a deed of covenant to pay is and why it is used.
What is a Deed of Covenant to Pay?
A Deed of Covenant is a legally binding way to promise the payment of money to another person without receiving anything in return.
The person who promises to pay the money is called the covenantor, whilst the party receiving the money is known as the covenantee. It is important that the covenantor receives no benefit at all – financial or in kind – in return.
When is a Deed of Covenant used?
One of the reasons people choose to draw up a Deed of Covenant is due to the associated tax benefits. A Deed of Covenant can be a tax efficient means of gifting money to your children and of safeguarding those gifts in the event of you losing the capacity to make these gifts in the future.
Under Section 21 of the Inheritance Tax Act 1984, payments that form part of the donor’s regular spending - those coming out of their income whilst leaving them with enough income to continue their normal standard of living - are exempt from inheritance tax. However, under the Mental Capacity Act 2005, where donors have in place Enduring Power of Attorney or Lasting Power of Attorney, the attorney is restricted in what gifts they can allow.
Therefore, by entering into a Deed of Covenant, all future payments are safeguarded during the lifetime of the deed, whilst exempting them from Inheritance Tax in the future. Covenant payments are not seen as diminishing the value of the estate.
Under the Gift Aid Scheme, covenantees can claim tax relief on the donations. In order for the covenantee to claim the tax relief on the covenant payments, the covenantor must sign a valid Gift Aid form. This can be incorporated into the Deed of Covenant.
How to make a Deed of Covenant to Pay
In order for a deed of covenant to be legally enforceable, it must be properly drawn up, signed, witnessed and delivered to the covenantee – the person who will be receiving the payments. You can download a template Deed of Covenant to Pay from The Legal Stop, which you can complete and sign in front of a witness.
The deed only comes into effect on the date that it is created, and it cannot be backdated. Make sure that you have entered into the deed before starting to make any payments, since payments transferred before the deed is made or after it ends cannot be associated with the deed.
Once the deed is entered into, all payments must be made according to the dates and amounts agreed in the deed.
The contents of this article do not constitute legal advice and are provided for general information purposes only.
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Catherine is our legal editor, she writes website and blog content for a range of industries including legal, business and retail. Having graduated from Exeter University with a degree in French and Spanish, Catherine spent some time working abroad before returning to Devon. She now juggles a writing career that she loves with bringing up two young children and exploring the Devon and Cornish coastline.