Updated: Aug 20, 2021

Written agreements to pay a stated sum to a stated f)erson or organization for a stated number of years. If the payment is for charitable purposes, the payee can treat the sum received as paid out of the taxed income of the payer and reclaim the tax suffered in producing that net amount. At one time only standard rate tax could be so recovered, but in recent years the recovery of higher rates of tax up to a fixed ceiling has been permitted where the beneficiary is a registered charity.

Although the covenant system was primarily intended to help registered charities. it has become an increasingly common way for parents to provide funds for children who are in full-time education. The parent covenants a certain sum to the child and the covenants a certain sum to the child and the covenanted. Thus the child receives a benefit greater than the cash granted by the parent, the Inland Revenue providing the difference from tax already collected from that parent. Originally, a covenant had to continue for at least seven years. This rule has been relaxed and it is only necessary for the donor to be prepared to continue the payment, not actually to do so, and the amount paid over can be varied at the option of the donor. Details of covenants must be given on annual income tax returns and the donor must provide a written declaration of tax deducted to the Inland Revenue annually.

Reference: The Penguin Business Dictionary, 3rd edt.

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James Knight
Editor of Education
James is a lead content editor for Invezz. He's an avid trader and golfer, who spends an inordinate amount of time watching Leicester City and the… read more.