Choice of Law and Domicile for UK Expats Living in Cyprus: A Guide to Succession and Inheritance Tax Implications

Introduction

UK expatriates living in Cyprus face unique legal challenges when it comes to estate planning, particularly in regard to succession laws and inheritance tax. For individuals with cross-border assets, the ability to choose which country’s laws will govern their estate and understanding how domicile impacts inheritance tax are crucial components of ensuring that their wishes are respected after death and that their heirs are not subject to unexpected tax liabilities.

This article provides a detailed exploration of the EU Succession Regulation (EU) No 650/2012—commonly known as Brussels IV—and its implications for UK nationals residing in Cyprus. It also highlights the importance of understanding domicile and the impact it has on UK inheritance tax (IHT). By combining these two elements, we offer a clear view of how UK expats can plan their estate effectively, both in terms of succession and taxation.

1. Choice of Law Under the EU Succession Regulation (Brussels IV)

1.1 Overview of Brussels IV

The EU Succession Regulation (Regulation 650/2012) governs cross-border successions for individuals residing in the European Union. Although the UK opted out of Brussels IV, the Regulation remains relevant for UK nationals who reside in EU Member States like Cyprus. The Regulation applies to all successions for individuals who die after 17 August 2015.

One of the key features of Brussels IV is that it allows individuals to choose the law of their nationality to govern the succession of their entire estate. This is particularly useful for UK nationals living in Cyprus who wish to avoid the forced heirship rules that apply under Cypriot law (Cap 195), which may automatically allocate portions of their estate to certain heirs, such as children or spouses, regardless of their wishes.

1.2 Application of Choice of Law for UK Nationals

Article 22 of the EU Succession Regulation allows UK nationals living in Cyprus to choose UK law to govern the succession of their movable and immovable property, both in Cyprus and the UK. If no choice of law is made, Article 21 applies, which defaults to the law of the country where the deceased had their habitual residence at the time of death—likely Cyprus in the case of UK expats living there.

By choosing UK law, UK expats can avoid Cyprus’s forced heirship rules, which could dictate how their estate must be distributed. This gives them testamentary freedom, allowing them to leave their property, both movable and immovable, to beneficiaries of their choosing.

1.3 Formal and Substantive Validity of Wills

Choosing UK law impacts the substantive validity of the will, meaning that the rules governing how the estate is distributed will follow UK law. However, Article 27 of Brussels IV governs the formal validity of wills. A will dealing with immovable property in Cyprus (such as real estate) must comply with the formal requirements of Cypriot law if the property is located there, even though UK law governs the substance of the will.

Example:

A UK national residing in Cyprus owns a house in Peyia. If they elect UK law to govern their estate under Brussels IV, UK law will determine who inherits the house. However, the formalities of the will (such as signing and witnessing) may still need to comply with Cypriot formal requirements if the house is in Cyprus.

2. Domicile and Inheritance Tax for UK Expats

2.1 Domicile vs. Residence

While residency refers to where a person lives for tax and legal purposes, domicile is a broader and more permanent legal concept. It is a key determinant in UK inheritance tax liability. Domicile generally refers to the country an individual considers their permanent home and where they plan to return.

There are three main types of domicile under UK law:

  • Domicile of Origin: Acquired at birth, typically the domicile of the individual’s father.
  • Domicile of Choice: Acquired by moving to a different country and forming an intention to reside there permanently.
  • Deemed Domicile: Individuals are considered deemed domiciled if they have been UK residents for 15 of the last 20 tax years or if they were domiciled in the UK in the previous three years before death.

2.2 The Impact of Domicile on Inheritance Tax

For UK nationals living in Cyprus, domicile determines their liability for UK inheritance tax (IHT). IHT is charged at 40% on the value of an estate that exceeds the nil-rate band of £325,000.

  • UK-Domiciled or Deemed Domiciled Individuals: If a UK national remains domiciled in the UK, their worldwide estate—including any immovable property in Cyprus—will be subject to UK inheritance tax. This includes property in both the UK and Cyprus.
  • Non-UK Domiciled Individuals: If a UK national acquires a domicile of choice in Cyprus and is no longer deemed domiciled in the UK, only their UK assets will be subject to UK inheritance tax. Assets located outside the UK, such as immovable property in Cyprus, will not be taxed in the UK. However, while Cyprus does not currently have an inheritance tax, future changes to Cypriot tax laws could introduce local taxation on inherited assets.
Example:

A UK national who owns a house in Cyprus worth €500,000 and remains domiciled in the UK will have the value of the property included in their UK IHT calculations. If their entire estate exceeds the £325,000 nil-rate band, UK IHT will apply to the property in Cyprus. On the other hand, if they have acquired a domicile of choice in Cyprus, only their UK assets will be subject to UK IHT, while the Cyprus property will be exempt from UK inheritance tax.

2.3 Double Taxation Treaties

The UK-Cyprus Double Taxation Treaty ensures that UK expats do not face double taxation on their estate. Since Cyprus does not currently levy inheritance tax, this is not a pressing concern. However, if Cyprus were to reintroduce inheritance tax in the future, the treaty would allow individuals to claim a credit for taxes paid in Cyprus against their UK inheritance tax liability.

3. Interplay Between Choice of Law, Domicile, and Renvoi

3.1 Choice of Law and Immovable Property

Under Brussels IV, individuals can choose UK law to govern their entire estate, including immovable property located in Cyprus. This ensures that their wishes regarding the distribution of their estate are respected, and they are not subject to Cypriot forced heirship rules.

However, Article 34 of Brussels IV addresses renvoi, a principle in private international law where a country refers a legal issue back to another country’s legal system. Renvoi applies in cases where the law of a third state (non-EU country) governs the succession.

Exclusion of Renvoi in Case of Choice of Law:

When a UK national living in Cyprus explicitly elects UK law under Article 22 of Brussels IV, renvoi is specifically excluded under Article 34(2). This means that Cyprus cannot refer the matter back to Cypriot law for immovable property located in Cyprus. Instead, UK law fully governs the succession, ensuring that the deceased’s wishes are respected without interference from Cypriot forced heirship rules.

Example:

A UK national owns a villa in Cyprus and opts for UK law to govern their estate under Article 22. Since renvoi is excluded under Article 34(2), Cyprus cannot refer the matter back to its own succession laws. As a result, UK law governs both movable and immovable assets in Cyprus, and the UK national can distribute their estate freely, without being subject to forced heirship rules in Cyprus.

3.2 Domicile and Inheritance Tax on Immovable Property

While choice of law governs how the estate is distributed, domicile determines whether UK inheritance tax applies to the estate, including immovable property located abroad.

  • UK-Domiciled Individuals: If a UK national remains domiciled in the UK, their immovable property in Cyprus will be subject to UK inheritance tax, regardless of the fact that UK law governs the succession.
  • Cyprus-Domiciled Individuals: If a UK national has acquired a domicile of choice in Cyprus, the immovable property in Cyprus would not be subject to UK inheritance tax. Instead, only UK assets would be taxed in the UK.

4. Conclusion: Key Considerations for UK Expats in Cyprus

For UK expats living in Cyprus, understanding the relationship between choice of law, domicile, and inheritance tax is crucial for effective estate planning.

  1. Choice of Law: UK nationals can elect UK law to govern the distribution of their estate under Brussels IV, ensuring that they avoid Cypriot forced heirship rules. Renvoi does not apply if UK law is chosen, allowing full testamentary freedom.
  2. Domicile: Domicile remains the key factor in determining UK inheritance tax liability. Individuals domiciled in the UK will be subject to UK inheritance tax on their worldwide estate, including immovable property in Cyprus. Acquiring a domicile of choice in Cyprus may exempt them from UK inheritance tax on non-UK assets.
  3. Tax Planning: UK expats must consider both their choice of law and domicile to minimise inheritance tax liabilities and ensure their estate is distributed according to their wishes.

By carefully planning their estate and seeking professional legal advice, UK nationals residing in Cyprus can make informed decisions about their succession and inheritance tax obligations, ensuring that their beneficiaries are protected.

5. How Our Law Firm Can Assist You

At Chambers & Co, we understand the complexities faced by UK expatriates in Cyprus when navigating the legal issues surrounding succession, choice of law, domicile, and inheritance tax. Our team of experienced legal professionals is well-versed in both Cyprus and UK law, as well as the intricacies of EU Succession Regulation (Brussels IV).

We offer a comprehensive range of services to help UK expats with their estate planning needs:

  • Succession Planning: We can assist you in preparing wills, trusts, and other legal instruments that comply with your choice of law and ensure your wishes are fully respected in both the UK and Cyprus.
  • Choice of Law Consultation: Our experts can guide you through the choice of law provisions under Brussels IV, helping you understand the benefits of electing UK law to govern your estate, and ensuring your movable and immovable property are distributed according to your preferences.
  • Domicile Advice: We provide specialized advice on domicile and its implications for inheritance tax, ensuring you understand how your domicile status affects your tax liabilities in both the UK and Cyprus.
  • Tax Planning: We offer strategic inheritance tax planning to minimize your exposure to UK inheritance tax, considering both cross-border assets and double taxation treaties between the UK and Cyprus.
  • Estate Administration: Should the need arise, we can assist in the administration of estates in both Cyprus and the UK, ensuring smooth and efficient probate procedures, including the handling of complex cross-border legal matters.
  • Legal Opinions: We provide tailored written legal opinions on the application of Brussels IV, UK law, and Cypriot law in succession matters, supported by in-depth legal references and specific recommendations for your situation.

By working with Chambers & Co, you can be confident that your estate is in capable hands, and that all legal, tax, and inheritance matters will be handled with precision and care. Whether you are planning for the future or need immediate assistance, our legal experts are here to provide you with the best possible guidance.

Contact us today to schedule a consultation and secure your family’s future.