Family Deeds of Covenant

HC Deb 24 July 1989 vol 157 cc547-9W

Mr. Wallace

To ask the Chancellor of the Exchequer (1) if he will reproduce in theOfficial Report the text of the Inland Revenue press release sent out following the 1988 Budget regarding the date by which notification of family deeds of covenant executed before 15 March 1988 had to be intimated to the Inland Revenue; and to which newspapers and periodicals this press release was sent;

(2) what information he has regarding the newspapers and periodicals in which there was publication of a reference to the Inland Revenue press release issued after the 1988 Budget and relating to the 30 June deadline by which intimation had to be made to the Inland Revenue of family deeds of covenant executed before 15 March 1988.

Mr. Norman Lamont

[holding answer 20 July 1989]: The text of the Inland Revenue press release issued on 15 March 1988 was as follows: The Chancellor proposes in his Budget to abolish tax relief for payments made by individuals under non-charitable Deeds of Covenant made on or after today. Recipients will be exempt from tax on the payments. This will greatly simplify the existing system. The change will apply to covenants made to students by their parents, as well as to other covenants. Parental contributions to student grants will, however, be reduced for new students. Full details will be published by the Department of Education and Science tomorrow.

Details

1. Non-charitable covenants made by individuals on or after 15 March 1988 will have no effect for tax purposes. This means that: payers should not deduct tax from covenanted payments and will not get tax relief on them, and recipients will not pay tax on them or be able to claim repayment.

2. The present rules will continue to apply to all covenants in favour of charities; other covenants made by individuals before 15 March 1988 provided they are received by the tax office by 30 June 1988.

Deduction of tax

3. The effect of the reduction in the basic rate of income tax on charitable covenants, and on other covenants made before today, is set out in a separate Press Release.

NOTES FOR EDITORS

Present tax position

1. A deed of covenant is a way of legally transferring income from one person to another. It can be effective for tax purposes under present law if it is capable of running for more than 6 years (or more than 3 years if it is in favour of a charity).

2. On making each payment under the covenant the payer deducts basic rate tax and so gets basic rate relief. If the recipient is not liable to tax he can claim the tax deducted from the payment back from the Inland Revenue.

Effect of the Budget proposals

3. The payer will not be entitled to deduct tax from payments made under a new covenant (unless it is to a charity). If he covenants to pay £100, that is the amount he will pay and the recipient will receive. The Inland Revenue will not be involved. A separate Treasury Press Release explains the background to the proposals. Details will be available from tax offices shortly.

Students

4. Student covenants made on or after 15 March 1988 will be treated in the same way as other new covenants. But since the payments will no longer be taxable, students will have the whole of their personal tax allowances to set against other income, such as vacation earnings. Furthermore, for new students there will be a new and more generous scale for assessing parental contributions to their maintenance grants.

A word of warning

5. A Deed of Covenant is a legal document and it is not permissible to put a date on it earlier than the date it is executed. This will result in refusal of any tax refund. It can also result in prosecution by the Inland Revenue for attempted fraud.

Other transfers of income

6. Covenants which transfer income from one person to another are "annual payments". The proposals will also apply to other "annual payments" which transfer income in a similar way from an individual to someone else; but they will not apply to interest payments or to payments made for commercial reasons in connection with the payer's business.

Copies of the press release were sent to all national newspapers, over 200 other periodicals and local newspapers, and over 3,000 individuals and organisations which receive copies of Inland Revenue press releases on subscription. A leaflet was also available from local tax offices shortly after 15 March 1988.

There were many articles in the press about various aspects of the 1988 Budget measures, including the changes in the tax treatment of non-charitable covenants. Comprehensive information about press reports is not available, but the particular point about the 30 June 1988 deadline which the hon. Member has in mind was specifically mentioned in a number of publications, including the Financial Times, The Daily Telegraph, Which?, Taxation and the New Law Journal. The point was also covered in the BBC radio programme "Money Box".