Back in 2015, the introduction of the non-domiciled (non-dom) tax resident status in the Cyprus tax system paved the way for opportunities in tax planning and savings. At the same time, the new domicile rules also created potential inheritance tax benefits. It is however not that straight forward as it requires careful individual attention.
The Special Defence Contribution (SDC) change affects physical persons that consider Cyprus to be their tax base. Prior to the amendment, a tax resident, non-dom individual would pay the following taxes:
- Dividend income at 17%
- Interest income at 30%
- Rental income at 3%
Following the amendment to the SDC law, Cyprus resident non-dom individuals will no longer be subject to SDC. However an individual who is a tax resident of Cyprus for a period of at least 17 out of the 20 years prior to the tax year of assessment cannot benefit from the above exception. This effectively means that if a non-dom individual becomes tax resident in Cyprus this year he/she will not be liable to pay SDC tax for the next 17 years. This brings a huge advantage to savers who previously had to declare dividend and interest income even from abroad, as the SDC applies to world-wide income.
In summary, if you have, either, just moved to Cyprus or have lived here for less than 17 out of the last 20 years then you no longer have to pay the SDC until you have reached the 17 year trigger. Whilst this is very positive – it can have the opposite affect for those that have spent much longer here, i.e. those who have spent at least 17 out of the last 20 years here. For them, the above exemption does not apply and they must pay the SDC.
Domicile and Inheritance Tax
Inheritance tax (IHT) is the tax which is paid on an estate when the owner of that estate dies. Depending on certain criteria, the tax may also be payable on gifts or trusts made during that person\’s life. Inheritance tax is paid by the executor using funds from the estate of the deceased. However, the payee of inheritance tax is dependent on a number of factors, and each circumstance may affect who should pay the inheritance tax owed.
Even if you are an expat living outside of the UK, you will still be subject to inheritance tax in the UK if you are deemed to be of a UK domicile status. If you have lived in Cyprus for at least 17 of the last 20 years then it is possible that you have become deemed domiciled in Cyprus. If not then you will remain UK domiciled and if your estate is valued at over £325,000 your estate will be subject to inheritance tax at 40%. Since 2007, the threshold has increased to £650,000 for married couples and civil partners, providing the executors transfer the first spouse\’s/partner\’s unused inheritance tax threshold to the second partner when they die.
Application of UK Inheritance Tax
It is important to note that even if the 17/20 rule applies to you, this does not automatically mean that you are no longer UK domiciled and will avoid UK IHT. For example, if you have maintained a property in the UK then this demonstrates that you still have a strong connection there. The UK authorities will deem this as evidence that you have maintained your UK domicile and will be taxed accordingly. The 17/20 rule cannot be treated in isolation.
In summary, if the 17/20 rule does not apply to you then this avoids payment of SDC on income and dividends. It does however mean that you are most likely to still be UK domiciled for inheritance tax purposes. If you are married and your estate is less than £650,000 then no IHT would apply. If the 17/20 rule does apply to you then you must pay the SDC on your worldwide income. If you have broken all ties with the UK, there is a good chance that you have also become deemed domiciled in Cyprus and no inheritance tax would apply.
I stress that every individual circumstance is different and you are encouraged to seek professional advice in this area. Importantly, there are solutions to mitigate IHT and we can assist in ensuring your wealth is passed on to your loved ones rather than the tax man.