By Ian Cowie Your Money Last updated: March 26th, 2013
Cyprus encouraged many British pensioners to retire to the island with favourable tax treatment – but that proved cold comfort when the credit crisis forced banks to close.
Cyprus encouraged many British pensioners to retire to the Mediterranean island with a fixed 5pc tax rate in retirement and the ability to receive British State and company pensions without deduction of any tax.
Under the terms of the tax treaty between the United Kingdom and Cyprus signed long before the credit crisis, pensioners received favourable treatment. For example, each individual pensioner could choose to pay a flat rate of 5pc income tax on their worldwide income in excess of a small personal allowance.
Alternatively, each individual pensioner could choose to be allowed a larger allowance or tax-free band and then pay tiered rates of tax up to 30pc on income in excess of the threshold. There was no Inheritance Tax nor any Wealth Tax in Cyprus.
One financial adviser told me: “Many individuals retired to Cyprus to make their pensions go further. The UK/Cyprus double taxation treaty enables individuals who live in Cyprus to remit their UK occupational, personal and state pensions to Cyprus free of withholding tax in the UK.
“The pensions are then taxed in Cyprus at a flat concessionary rate of 5pc. For this reason, UK individuals with a large pension income stream can exchange income tax at 40pc in the UK for a rate of 5pc in Cyprus. This is one of the attractions of retirement there.”
But the credit crisis and the closure of Cypriot banks – plus the imposition of capital controls – make all those incentives seem like halcyon days a very long time ago. Here and now, tax haven status can turn into a trap if the economy proves to be built on sand. Avoiding tax is small comfort if you cannot withdraw cash from the bank or take your own money out of the country.
While pensioners can scarcely be expected to keep an eye on the macroeconomics of national finance – which can even take national leaders, like the Russian prime minister Dmitry Medvedev, by surprise – it demonstrates the dangers of allowing tax considerations to determine your choice of retirement location. Or as the City saying goes: "Don't let the tax tail wag the investment dog."
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Ian Cowie was named Consumer Affairs Journalist of the Year in the London Press Club Awards 2012. He has been head of personal finance at Telegraph Media Group since 2008, having been personal finance editor since 1989. He joined the paper in 1986. He is @iancowie on Twitter.
Cyprus: tax haven status turns into a trap for British pensioners – Telegraph Blogs
