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Tax shock for British residents in Cyprus

The revised UK and Cyprus Double Taxation Convention, which was signed on 22 March, could result in higher taxes for some retired British residents in Cyprus whose pensions are paid by the UK Government.

Tax shock for some British residents in CyprusEARLIER this month Cyprus and the United Kingdom signed a revised double taxation convention, based on the OECD Model Convention for the avoidance of double taxation on income and capital.

(The Organisation for Economic Co-operation and Development (OECD) is an intergovernmental economic organisation with 35 member countries, founded in 1961 to stimulate economic progress and world trade.)

The new convention will enter into force once both countries have completed their respective domestic ratification procedures and will replace the current agreement, which was signed in June 1974.

Tax on pensions

Under the provisions of the 1974 agreement the income received by UK nationals resident in Cyprus from their UK pensions and annuities is taxed by the Cypriot authorities and therefore exempted from UK tax.

The changes made to the 2018 convention to conform to the OECD model  result in changes to the tax arrangements of some UK nationals resident in Cyprus.

Under the new convention those in receipt of UK state pensions, private pensions and annuities will continue to pay tax on the income they receive to the Cypriot authorities as before.

Government pensions

However, those in receipt of pensions paid by Her Majesty’s Government (HMG), local authorities and ‘political sub-divisions’ will be taxed on the income they receive from those pensions by Her Majesty’s Revenue and Customs (HMRC) in the UK.

This will impact pensions received by retired UK civil servants, armed forces personnel, NHS staff, teachers, local government employees, police etc. whose pensions will be taxed by HMRC once the 2018 convention has been implemented.

From the correspondence I’ve received this change will come as good news to some and bad news to others.

In some cases the change will result in them paying no tax in Cyprus or UK as their income falls below the tax thresholds in both countries.

Some will pay about the same, while others with large pensions and those with HMG pensions and other income that is taxed in the UK (E.g. from UK property rental) will pay more tax.

I’ve also received many angry emails, predominately from retired armed forces personnel resident in Cyprus, demanding to know why the UK is discriminating against those who served their country in the public service.

I have reviewed several UK Tax Treaties including Albania, Bahrain, Canada, Japan and Spain; all of them require HMG pension income to be taxed by HMRC.

Options

I suggest those who may be negatively affected by the change to consult a UK Tax consultancy to see what options are available (if any) to legally reduce their tax liability.

Interestingly the 2018 convention concerning Government Service and pensions (pages 17-18) states “However, such pensions and other similar remuneration shall be taxable only in the other Contracting State if the individual is a resident of, and a national of, that State.”

Readers' comments

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  • Patricia Jackson says:

    My husband and I have lived in Cyprus for 16 years and have permanent residency status. We are tax resident in Cyprus. I have two small UK Government pensions. Please can you tell me if I would be liable to pay tax at source by UK HMG on these two pension and would it be on the entire amount of the pensions, or would the UK tax threshold apply?

    Also, you mention that becoming a citizen of Cyprus would exempt us from the new rules. Does this mean we would have to apply for a Cypriot passport for dual citizenship?

    Ed: No-one can say with absolute certainty how the tax rules will change until Cyprus and UK have ratified the DTA. But if it’s the same as Spain, for example (where HMG pensions are taxed at source by HMRC), HMG pensions will be taxed at source in the UK and you’ll be entitled to the personal allowance of £11,850.

    If you apply for Cypriot citizenship HMRC may consider that you have done so to evade paying tax in the UK.

    As I wrote in the article, “I suggest those who may be negatively affected by the change to consult a UK Tax consultancy to see what options are available (if any) to legally reduce their tax liability.”

  • Chris Hamilton says:

    I note that included in the list is Local Government Pensions and would make the following comments:

    A Local Government Pension is not a Government Pension, it is paid into an investment fund by Local Authorities;

    Local Government Pensions require contributions by the eventual recipient like other sectors that are excluded by this latest change;

    It is perfectly understandable that non-contributory Pension paid by Government Departments are taxable in the U.K; and finally

    Why are Privatised Industry Pension schemes, pensioned employees of RSB who were largely owned by British Taxpayer not included?

    This change is symptomatic of this UK Government’s vindictive and spiteful attitude to Local Government.

    Ed: I cannot comment on behalf of HMG, but the OECD Model Convention states the following regarding Government Service:

    OECD Model Government Service

  • alan cottrell says:

    Obviously just being resident in Cyprus (ie yellow slip) does not help anyone in this situation unless they are a national (ie citizen of Cyprus) as well. Anyone got a spare €2 million to help me buy a property plus citizenship so that I don’t have to wait 10 years????????

    Ed: You can apply for Cypriot citizenship after you have been a legal resident in Cyprus for 7 years.

  • Alex G Grant says:

    In fairness to Britain I can see their point. Why should so called citizens use living in another country to assist themselves in getting more for themselves and deny their countries Goverment their dues? People should pay their taxes where they receive their money from. End of.

  • pete robinson says:

    Ref personal tax allowance. See ‘gov.uk’ Personal tax allowance.

    It refers to one being in an EEA member state, we still will be, even after Brexit, but as WE will not be EEA, will it still apply??

    I have also seen another reference but for the life of me cannot find it again. Age!

    Ed: Received the following “Have just been talking with a friend who has resided in Spain for nearly 20 years. He pays tax on his military pension at source but can claim the personal tax allowance despite being registered to pay tax in Spain. Interestingly, his old age pension is taxed in Spain where he uses the Spanish personal tax allowance. He says that the Spanish tax authorities are not interested in any income where he pays tax at source in UK.”

    We’ll have to wait and see whether the same will apply in Cyprus.

  • Phil says:

    Those that represented Cyprus within the Cyprus Gov must have had their eyes shut when agreeing to this, or did they have a choice, as the outcome will be a loss of income tax for Cyprus.

    To much Sketo me thinks.

  • Mr Alun Evans says:

    There is a definite discrimination here against those whose pension is paid by the government. I have read other double taxation treaties with Cyprus and other countries and the UK is the only one where the most honest, and easy targets are being hit i.e. those with traceable income, as stated above. The UK government is a disgrace, and is acting like the Totalitarian State it has become.Democracy and fair play went out of the window with Brexit.

  • pete robinson says:

    Re Martyn Ware – As I read it you will be taxed in Cyprus if you are a Nation, regardless of your previous job. However beware that it also states, that if, in their opinion, you obtained Nationality to escape tax, the clause will not apply.

    There are of course many reasons to obtain Nationality, your wife, Brexit etc.

    Ed: I (and others here) would like to know where to find this information.

  • pete robinson says:

    I think you will find that the position is worse than you state. The UK tax allowance is not available in the case of government pensions paid abroad. This means people like myself will lose 20% of their armed forces pension, 15% of my total pension, allowing for the fact I will pay no Cyprus tax.

    Indeed, has the Cyprus government realised that this treaty will deprive them of ANY tax revenue from the majority of affected residents.

    Ed: I haven’t been able to find anything that says the UK tax allowance is not available in the case of government pensions paid abroad. Do you know where I can find the information?

  • Jeanette Mooney says:

    Hello Nigel, just read the new taxation requirements on persons receiving UK pensions eg state retirement and NHS pensions.My question is we have permanent residency status in Cyprus and have been residing here for 16 years,and have paid taxes here since then. Would we qualify to continue this? if not these changes will mean we pay a considerable larger amount.

    Ed: Unless your a national of Cyprus Income Tax your NHS pensions will be paid to HMRC. Income Tax on your state retirement pensions will be paid to the Cypriot authorities.

  • Martyn Ware says:

    It would appear that if I become a Cypriot National (My Wife is Cypriot) then my UK Govt. pension will continue to be taxed here in Cyprus and at the 5 percent tax rate. I will need to check this out to be sure.

    Ed: Yes, you’ll need to check. It could also be that this will only apply to Cypriot nationals who receive an HMG pension by virtue of their employment by the UK Govt. such as those who worked for the SBA authorities or perhaps the Civil Service in the UK and who now reside in Cyprus.

  • David Stokes says:

    Just to reassure people that they are not being singled out for unfair treatment, the 1974 UK-Cyprus double tax agreement was the only one of the UK’s double tax agreements providing for pensions in respect of past government service to be taxed in the overseas country. All the UK’s other double tax agreements provide for such pensions to be taxed in the UK. No doubt when the double tax agreement with Cyprus was revised, the UK authorities took the opportunity to make it consistent with all the other UK double tax agreements.

    Ed: I checked several DTAs and all were the same regarding Govt. pensions and some dated back to the 1990a.

  • Joseph Arthur Johnston says:

    Teresa May has often stated that she strives to up hold fairness in all government policy. This is a classic case to stand up for justice and not allow civil service policy makers to introduce illogical unjust policy.

    To much is decided by faceless individuals that effects us purely for administrative convenience without any other logic other than a increase in UK tax revenue. Further where HM Forces are concerned almost without exception serving personnel receive Overseas Allowance to assist with the cost of living abroad. May we expect a new allowance to offset the loss of Heating Allowance and this unjust income tax raid?

    I might add that we are leaving the EU to avoid unnecessary red tape! It seems odd that the very rules for taxation go unflaunted by Google and Starbucks who pay more or less what they want in countries they have business in, but with most of profit avoiding the rightful tax by movement elsewhere.

  • Penny Pinching says:

    Plenty of UK Landlords are attempting to sell property because of the increased rental taxation which no longer makes it worthwhile to buy to let but run into huge capital gains tax problems it they do so which makes the decision on what to do even more difficult, one piece of advice is if the Cyprus residents are renting their own home in the UK they should be able to sell it and avoid the capital gains penalty. The first £4,000 of rental income in your own home is exempt. Anyone with more than one rented property is screwed on them all, as for the government pensions that is one reason to have never worked for the ******** 🙂

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