UK tax in 2025 and beyond, and implications for expatriates in Cyprus

The UK’s autumn budget introduced several tax changes, many of which reach beyond its shores to also impact British expatriates in Cyprus.

If you’re already enjoying life in Cyprus, it may be time to rethink the assets you left behind in the UK. If you haven’t relocated here yet, is it time to accelerate your plans? Cyprus is well known for its lifestyle benefits but also offers many tax advantages.

Income and investment taxes

There was no increase to income tax rates. The freeze to income tax thresholds will not be extended past the scheduled April 2028, when they will rise with inflation. That said, many people will pay more tax over the intervening three years thanks to fiscal drag.

Capital gains tax rates on investment returns increased to 18% and 24% to match real estate rates, with effect from 30 October. This is after the CGT allowance was slashed from £12,300 to £3,000 since 2023.

The business assets disposal relief rate increases to 14% from April 2025, then 18% a year later.

The Chancellor also froze the maximum ISA contribution at £20,000 until 2030 and increased the surcharge on stamp duty land tax on secondary homes from 3% to 5%.

Inheritance tax (IHT)

The inheritance tax threshold freeze was extended to April 2030 – the main nil rate band will have been frozen for a staggering 21 years! Keeping the threshold frozen drags many more families into the inheritance tax net and increases tax bills. Significant reductions to business and agricultural IHT reliefs were also announced.

Remember, any assets you own in the UK remain liable to UK inheritance tax, regardless of how long you live abroad. The domicile reform won’t change this either.

But, the most significant change is that pensions will become liable for inheritance tax. With effect from 6 April 2027, any unused UK pension funds and death benefits will be included in the value of your estate for UK inheritance tax purposes.

Pensions Overseas Transfer Charge hits retirees in Cyprus

Announced alongside the budget, transfers from UK pensions to EU/EEA QROPS now incur the 25% Overseas Transfer Charge (OTC). With effect from 30 October 2024, the OTC exemption only applies if you are resident in the same EEA country as the QROPS. Unfortunately, for retirees, there are no QROPS in Cyprus (the only suitable QROPS are in Malta and Gibraltar).

British expatriates may now feel they face a dilemma: leave their pension exposed to inheritance tax (plus potentially income tax when your heirs withdraw income or capital sums from it), or suffer the 25% levy. However, Cyprus residents may have other options to achieve their long-term objectives, so contact our specialist advisers to find out how we can help; you may be very pleasantly surprised.  We provide cross-border integrated advice covering pensions and taxation in Cyprus and the UK, and our advice and recommendations are personalised for each client.

Non-domicile reform

From April 2025, the current domicile/non-domicile regime will be replaced by a new residence-based system. This will apply to tax liabilities for foreign nationals living in the UK and new arrivals, as well as British expatriates in relation to inheritance tax.

Put simply, an individual will be liable for UK inheritance tax on their worldwide assets when they are classified as a long-term UK resident (living in the UK for 10 of the last 20 years). When someone leaves the UK, they remain liable to inheritance tax for up to 10 years, depending on how long they had lived there.

This is a welcome reform for long-term British expatriates, many of whom have continued to be liable for UK inheritance tax on worldwide assets. Now is the time to review your estate planning to ensure you take full advantage of the new system, for example, by shedding UK assets.

Call to action

The budget was a call to action to ensure your financial planning is as tax-efficient as possible for you and your family. The Cyprus tax regime is so much kinder than the UK’s, with no local inheritance tax, capital gains tax only imposed on local real estate, and a highly attractive tax regime for foreign pensions. Moving assets out of the UK could prove very rewarding for Cyprus tax residents, as, of course, can relocating from the UK to Cyprus.

We have a team of pension and taxation specialists, and have had an office in Paphos for over 20 years.

Contact Blevins Franks today for personalised cross-border tax and wealth management advice.