There are many tax advantages to living in Cyprus: special rates for foreign pensions, an exemption for interest in many cases and no inheritance tax.
With relatively low income tax, limited capital gains tax and no inheritance tax, Cyprus can offer expatriates a beneficial tax environment for income, investments and UK pensions.
Are you thinking of living in Cyprus? There are many benefits to living on this Mediterranean island and, while taxation may not be top of your priorities when looking for a new home, it is certainly encouraging to know that the local tax regime is relatively attractive.
As a resident of Cyprus, you are taxable on your worldwide income. Certain income, such as bank interest and dividends, is taxable in the form of ‘defence contributions’ (see below). Rental income is subject to both income tax and defence contributions.
Your first €19,500 of income is tax free. Tax rates then start at 20% and rise progressively to 35% for income over €60,000.
Foreign pension income receives special treatment here; you choose how it is taxed each year:
- At a flat rate of 5% on the excess of €3,420 (this sum being exempt), or
- At the normal scale rates of income tax.
One particular advantage for British retirees is that, under the UK/Cyprus double tax treaty, most pension income is taxable solely in Cyprus. The exception is pension income paid in respect of government service. Since January 2019 this is taxable in the country which pays the income – so UK government service pensions are taxed in the UK, not Cyprus. However, individuals have the option to elect to pay tax in Cyprus on any UK government service pensions until 2024.
A pension commencement lump sum from a UK pension can be taken free of tax in both Cyprus and UK. However, if you wish to extract the full amount as a cash lump sum, any excess over the tax-free amount for UK purposes remains taxable in the UK.
Defence contributions – 17 years exemption
The defence tax applies to worldwide investment income of individuals who are resident and domiciled in Cyprus, at the following rates.
- Interest – 30% (reduced to 3% if your income is less than €12,000)
- Dividends 17%
- Rental income – 3% (on 75% of gross income)
Non-Cyprus domiciles are exempt from defence tax. Generally, you will be considered Cyprus-domiciled if you were born there or you have been resident for 17 out of the last 20 years. Most UK expatriates therefore escape tax on interest and dividends for their first 17 years of residence.
Note that this could affect a claim to be non-UK domiciled for UK inheritance tax purposes (see below). If necessary, seek advice on tax-efficient ways of holding your investment capital.
Download our guide to taxes in Cyprus
Capital gains tax
In Cyprus, capital gains tax is only payable on gains arising on the sale of real estate located in Cyprus – property in the UK or elsewhere is exempt. The rate is 20%.
Capital gains made on the sale of shares are generally not taxed in Cyprus. (Unlisted shares of companies which own real estate in Cyprus are taxable).
There is no capital gains tax on death, or on the transfer of assets between spouses and family members up to the third degree.
There is more good tax news for Cyprus – there is no inheritance or succession tax here. Your assets can pass to your heirs without them having to pay any local tax.
Unfortunately, this does not mean that British expatriates escape death taxes completely. If you remain UK domiciled, as many do in spite of living abroad for years, you remain liable for UK inheritance tax. Assets in the UK are always liable (if above the threshold) regardless of domicile. Seek specialist advice on how to avoid or mitigate this tax for your family.
One thing you need to be careful about is Cyprus’ succession law, which imposes ‘forced heirship’ rules. The bulk of your estate will be divided among direct family members and cannot be left feely to whomever you like.
However, there is an EU succession regulation that allows foreign nationals to opt, through their will, for the succession law of their country of nationality to apply on their death, instead of that of their country of residence. Take specialist advice first to establish what would work best for your family and heirs.
It is worth reviewing your pension funds when you move to Cyprus.
There are many options for your pensions these days and you need to understand how they all work and consider which would be best for you. The Cyprus tax regime can provide opportunities for retired British expatriates. This is a specialist area, so take professional, regulated advice.
While Cyprus taxation appears relatively straightforward, do take specialist advice to make sure you understand how all the rules affect you and to make sure you are paying tax in the right country, particularly if you continue to own assets and earn income in the UK. You also want to make sure you are holding your assets in the most tax-efficient way for Cyprus as well as to achieve your objectives for yourself and your heirs. If you have not yet left the UK, take advice before you dispose of UK assets to ensure you do that as tax-efficiently as possible.
Blevins Franks has offices in both the UK and Cyprus and can help you plan your move to the island and make sure you take advantage of all the tax benefits Cyprus to offer.
Any questions? Contact our advisers for personalised advice
Tax rates, scope and reliefs may change. Any statements concerning taxation are based upon our understanding of current taxation laws and practices which are subject to change. Tax information has been summarised; an individual is advised to seek personalised advice.