British nationals residing in Cyprus are facing a renewed and complex challenge in estate planning due to significant changes in UK Inheritance Tax (IHT) law, effective from April 2025. While Cyprus maintains its attractive zero inheritance tax environment, UK long-term residency rules could now subject the worldwide assets of many expats to a 40% IHT rate.
The UK’s New Residence-Based Tax Test
The United Kingdom has abolished the complex concept of ‘deemed domicile’ for IHT and replaced it with a simpler long-term residence test. This shift fundamentally changes who is liable for IHT on their global estate:
- New Liability Threshold: As of April 6, 2025, any individual who has been a UK tax resident for at least 10 out of the previous 20 tax years is considered a long-term resident. This status subjects their entire worldwide estate to UK IHT.
- The Exit ‘Tail’: Even after a person moves away and ceases to be UK tax resident, the liability for IHT on their overseas assets continues for a “tail” period, which can last between three and ten years, depending on their prior residency duration.
- IHT Rate and Allowances: The tax rate remains 40% above the current individual nil-rate band of £325,000. With the additional Residence Nil-Rate Band (RNRB) of £175,000 (when a main home is passed to direct descendants), a married couple can potentially transfer up to £1 million tax-free. However, the 40% rate applies to the value exceeding these allowances.
It is crucial to note that the existing Double Tax Treaty between Cyprus and the UK does not cover IHT, meaning UK IHT can be levied on Cypriot assets if the deceased falls under the UK’s long-term residence rules.
Cyprus Law: Freedom vs. Mandatory Shares
Cyprus abolished inheritance tax back in 2000, creating an inheritance-tax-free environment for assets located on the island. However, it imposes its own legal complexity through forced heirship provisions in its Wills and Succession Law (Cap. 195) .
- Statutory Portion: If a person leaves behind a spouse, children, or parents, the law dictates that a fixed portion of the estate must pass to these immediate relatives, irrespective of the deceased’s will.
- Disposable Portion: The individual is only granted freedom of testamentary disposition over the remaining, or “disposable,” portion of the estate.
This is a stark contrast to English law, which grants the testator almost complete freedom to distribute their estate as they wish.
The EU Solution: Choosing Your National Law
Fortunately, British nationals can navigate the Cypriot forced heirship rules by invoking the EU Succession Regulation (Regulation (EU) 650/2012).
- Right of Professio Juris (Choice of Law): Article 22 of the Regulation, in effect since 2015, allows any individual to choose the law of their nationality to govern their entire succession.
- Estate Planning Strategy: A British expatriate in Cyprus can expressly state in their Cypriot will that English law shall apply to their estate. This legal choice overrides Cypriot forced heirship, restoring the testator’s full freedom of disposition.
- Default Rule: Without this explicit choice, the law of the person’s habitual residence at the time of death (i.e., Cypriot law) will apply, triggering the forced heirship rules.
In summary, effective estate planning for Britons in Cyprus requires a two-pronged approach: addressing the potential UK IHT liability through proactive financial planning, and safeguarding testamentary freedom by using the EU Succession Regulation to opt for English law in their Cypriot will.
Source: Cyprus Property News