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Sunset over Akamas from Polis beach; enjoying residence in Cyprus

With just months to go before the end of the Brexit transition period, many UK nationals are rushing to secure residency in Cyprus. Those who are lawfully settled before 31st December 2020 can lock in a lifetime of citizens’ rights under the UK/EU Withdrawal Agreement. This protects access to healthcare, social security, education and employment opportunities for as long as you remain resident.

While most people are focussed on getting into the Cyprus system as quickly as possible, you also need to understand how the local taxation and succession rules will affect you and adjust your tax and estate planning accordingly. It’s also advisable to review your investments and pensions to ensure they are suitable for this new chapter of your life.

Getting it right from the outset makes things easier and cheaper, so do your research on living in Cyprus and take professional advice sooner rather than later. That said, there are usually steps you can take to improve your tax and estate planning even if you already live in Cyprus.

Tax residence in Cyprus

Generally, you are resident in Cyprus for tax purposes if you spend 183 days in the country in a calendar year. So if you move to Cyprus later this year, you won’t be liable for Cyprus income tax until 2021.

There is second rule where you can be tax resident spending just 60 days in Cyprus, but you also need to be employed or carrying on a business and not tax resident in another country.

Taxation in Cyprus

The good news is that taxation can actually be one of the advantages of choosing Cyprus as your new home!

Income taxes

Residents of Cyprus are taxable on their worldwide income paying either income tax or ‘defence contributions’ (or both in the case of rental income).

The defence tax applies to worldwide investment income of individuals who are resident and domiciled in Cyprus. The domicile rule means that most British expatriates are exempt for their first 17 years of residence (unless they were born in the Republic). For those who are not exempt, it charged as follows:

  • Interest – 30% (reduced to 3% if your income is less than €12,000)
  • Dividends 17%
  • Rental income – 3% (on 75% of gross income)

 All other income, plus rental income, is taxed at the scale rates of income tax.

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 and you choose how it is taxed each year:

  1. At a flat rate of 5% on the excess of €3,420 (this sum being exempt), or
  2. At the normal scale rates of income tax.

 

Under the UK/Cyprus double tax treaty, most pension income is taxable solely in Cyprus. Until December 2024 this can include income paid in respect of government service, but only if you elect for this in writing.

Pension commencement lump sums are not taxable in Cyprus. The 25% lump sum amount is not taxable in the UK either, but if you opt to take the whole of your pension fund as a cash lump sum, the rest of it is.

Capital gains tax

In Cyprus, capital gains tax is only payable on gains arising on the sale of real estate located in Cyprus – property outside Cyprus exempt. The rate is 20%.

Capital gains made on the sale of shares are generally not taxed in Cyprus.

Estate planning

First the good news – there is no inheritance tax in Cyprus.

However, if you remain UK domiciled, as many British expatriates do, you remain liable for UK inheritance tax. Assets in the UK are always liable (if above the threshold.

Opting to be a non-Cyprus domicile to escape defence contributions could potentially affect a claim to be non-UK domiciled for inheritance tax purposes. If necessary, seek advice on other tax-efficient ways of holding your investment capital.

You do however need to be careful about Cyprus’ succession law which imposes restrictions on how you can divide up your worldwide estate (excluding property outside Cyprus). You cannot freely leave assets to whomever you wish, as you generally can in the UK.

However, foreign nationals can use the EU succession regulations (‘Brussels IV’) to opt, through their will, for the law of their country of nationality to apply on their death instead of that of their country of residence. This is a complicated area of the law and we recommend you take personalised estate planning advice to establish what would work best for your family.

Your savings and pensions

Whenever there is a big change in your life, like moving to a new country, you should review your savings and investments to check they are suitable for you now. Are you holding the right spread of assets to meet your objectives, time horizon and risk tolerance? Once you are living in Cyprus, you may need to hold more assets in Euros and diversify away from UK shares and bonds.

Retirees should also review their pension funds and the options now available to them. Can you maximise your retirement savings without unnecessary risk? Should you move your pension out of the UK? If you are considering a Qualifying Recognised Overseas Pension Scheme (QROPS), remember the UK could start imposing a 25% ‘overseas transfer charge’ once it sheds its EU obligations.

Read more: Is time running out for tax-free pension transfers?

Strategic financial planning for Cyprus

Although the Brexit countdown is on to secure residency, take the time to ensure your finances are in the best possible position for your life in Cyprus. Every family is different, so your financial planning must be carefully designed for you. All the various aspects should work cohesively together to create an overall wealth management plan that provides long-term financial security for yourself and achieves your wishes for your heirs.

Contact Blevins Franks for personalised, professional advice. Our cross-border specialists are highly experienced at helping UK nationals settle in Cyprus and make the most of the opportunities there.

Contact a local adviser to discuss your plans

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.