UK nationals living in Cyprus and those planning to move there are generally pleased to leave UK taxation behind them. However you still need to understand how the UK tax regime may continue to affect you and your heirs, and follow any proposed tax reforms.
British expatriates living in Cyprus are generally pleased to have left UK taxation behind them. However you still need to understand how the UK tax regime may continue to affect you and your heirs, and follow any proposed tax reforms.
The UK government has announced quite a few changes, or proposed changes, over recent months which may affect you.
Taxing non-UK residents on property gains
Under current rules, provided you are non-UK resident for five years, you do not pay UK capital gains tax when selling UK assets.
This will change from next April, when non-residents disposing of UK residential property will start being charged UK tax on the gains.
The tax charge is envisioned to be equivalent to that which a UK resident would pay. Currently, all net gains arising in the relevant tax year (after the deduction of any losses arising in the year, losses carried forward and the annual £11,000 exemption) are added to income, and any part of the gain falling within the basic rate band is taxed at 18%, and any part of the gain falling above is taxed at 28%.
Non-residents will only be able to deduct losses on UK property, either arising within the same UK tax year or carried forward from a previous year (but not from before the charge came into existence). The net gain on UK residential property will be added to their UK-source income (although it is not clear how this will interact with income taxed in another country under a double tax treaty) and taxed at 18% or 28%.
The consultation is not entirely clear, but it looks like only gains arising from April 2015 would be taxed.
Restricting the personal allowance for non-residents
The UK government is considering withdrawing the personal allowance from non-residents. 400,000 non-resident individuals claim personal allowances and it costs the exchequer approximately £400 million a year.
UK nationals are currently entitled to the UK personal tax exempt allowance of £10,000 whether they are resident in the UK, Cyprus or elsewhere. A new consultation document proposes to restrict non-residents’ entitlement, unless they have strong economic connections with the UK.
If your only UK income comes from pension funds, you should not be affected since UK pension income is only taxable in Cyprus.
However you could be affected if you earn other income from the UK, such as rental or investment income. In this case you may wish to review tax efficiency of your assets.
Providing more pensions freedom
This is more positive news, as the government has decided that, from April 2015, individuals aged over 55 will be able to withdraw as much of their pension funds as they wish.
For UK taxpayers, any amount over the 25% tax free lump sum would be taxed at individual’s marginal UK tax rate.
However, for Cyprus residents the situation is much better.
You have two options as to how your foreign pension income is taxed here – at a flat rate of 5% on the excess of €3,420 (this being tax free), or at the normal scale rates of tax. You can choose whichever works out cheaper each year.
You could therefore potentially withdraw your entire pension fund for only 5% tax, but you do need to make sure you understand all the implications and take specialist advice to ensure you make the right decision for your long-term financial security.
On 29th September, UK Chancellor George Osborne announced that the UK government is to abolish the 55% pensions lump sum death tax charge for defined contributions pensions.
The new rules mean that if a person dies over the age of 75 years, beneficiaries will only pay their marginal tax rate on drawdowns from the pension. A lump sum option is likely to be available, subject to tax charge of 45%.
When an individual dies under the age of 75 years they will be able to give their pension pot to any beneficiary tax free, whether if the pension is already in drawdown or not.
We are still yet to see how QROPS are affected overall by the new pension rule changes.
All in all, you should seek specialist advice to review your UK assets and consider their tax efficiency. It may be time to make changes. Remember, there is no one-size-fits-all solution, your situation is unique and you need to establish which options will work best for you in both the short and long term. Seek personalised, specialist advice.
30 September 2014
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.