diff --git a/CHANGES.md b/CHANGES.md
index 2ec5c1ee6ec..e6e04d03a51 100644
--- a/CHANGES.md
+++ b/CHANGES.md
@@ -39,6 +39,16 @@ Maintenance release.
 [#5067](https://github.com/cylc/cylc-flow/pull/5067) - Datastore fix for
 taskdefs removed before restart.
 
+-------------------------------------------------------------------------------
+## __cylc-8.0.2 (<span actions:bind='release-date'>Pending YYYY-MM-DD</span>)__
+
+Maintenance release.
+
+### Fixes
+
+[#5066](https://github.com/cylc/cylc-flow/pull/5066) - Fix bug where
+.cylcignore only found if `cylc install` is run in source directory.
+
 -------------------------------------------------------------------------------
 ## __cylc-8.0.1 (<span actions:bind='release-date'>Released 2022-08-16</span>)__
 
diff --git a/cylc/flow/workflow_files.py b/cylc/flow/workflow_files.py
index 7b0a27164c1..9ffe79222d7 100644
--- a/cylc/flow/workflow_files.py
+++ b/cylc/flow/workflow_files.py
@@ -1477,8 +1477,9 @@ def get_rsync_rund_cmd(src, dst, reinstall=False, dry_run=False):
         if (Path(src).joinpath(exclude).exists() or
                 Path(dst).joinpath(exclude).exists()):
             rsync_cmd.append(f"--exclude={exclude}")
-    if Path(src).joinpath('.cylcignore').exists():
-        rsync_cmd.append("--exclude-from=.cylcignore")
+    cylcignore_file = Path(src).joinpath('.cylcignore')
+    if cylcignore_file.exists():
+        rsync_cmd.append(f"--exclude-from={cylcignore_file}")
     rsync_cmd.append(f"{src}/")
     rsync_cmd.append(f"{dst}/")
 
diff --git a/tests/functional/cylc-install/03-file-transfer.t b/tests/functional/cylc-install/03-file-transfer.t
index e35b527e2b6..2da6bb534b6 100644
--- a/tests/functional/cylc-install/03-file-transfer.t
+++ b/tests/functional/cylc-install/03-file-transfer.t
@@ -21,7 +21,7 @@
 if ! command -v 'tree' >'/dev/null'; then
     skip_all '"tree" command not available'
 fi
-set_test_number 6
+set_test_number 9
 
 # Need to override any symlink dirs set in global.cylc:
 create_test_global_config "" "
@@ -69,24 +69,36 @@ __OUT__
 popd || exit 1
 purge_rnd_workflow
 
-
-# Test cylc install copies files to run dir successfully, exluding files from .cylcignore file.
-TEST_NAME="${TEST_NAME_BASE}-cylcignore-file"
-make_rnd_workflow
-pushd "${RND_WORKFLOW_SOURCE}" || exit 1
-mkdir .git .svn dir1 dir2 extradir1 extradir2
-touch .git/file1 .svn/file1 dir1/file1 dir2/file1 extradir1/file1 extradir2/file1 file1 file2 .cylcignore
-cat > .cylcignore <<__END__
+# Test cylc install copies files to run dir successfully, exluding files from
+# .cylcignore file.
+# Should work if we run "cylc install" from source dir or not (see GH #5066)
+for RUN_IN_SRC_DIR in true false; do
+    TEST_NAME="${TEST_NAME_BASE}-cylcignore-${RUN_IN_SRC_DIR}"
+    make_rnd_workflow
+    pushd "${RND_WORKFLOW_SOURCE}" || exit 1
+    mkdir .git .svn dir1 dir2 extradir1 extradir2
+    touch .git/file1 .svn/file1 dir1/file1 dir2/file1 extradir1/file1 extradir2/file1 file1 file2 .cylcignore
+    cat > .cylcignore <<__END__
 dir*
 extradir*
 file2
 __END__
 
-run_ok "${TEST_NAME}" cylc install --no-run-name
+    if ${RUN_IN_SRC_DIR}; then
+        run_ok "${TEST_NAME}" cylc install --no-run-name
+        CWD="${PWD}"
+    else
+        DTMP=$(mktemp -d)
+        pushd "${DTMP}" || exit 1
+        run_ok "${TEST_NAME}" cylc install --no-run-name "${RND_WORKFLOW_SOURCE}"
+        CWD="${PWD}"
+        popd || exit 1
+    fi
 
-tree -a -v -I '*.log|03-file-transfer*' --charset=ascii --noreport "${RND_WORKFLOW_RUNDIR}/" > 'cylc-ignore-tree.out'
+    OUT="cylc-ignore-tree-${RUN_IN_SRC_DIR}.out"
+    tree -a -v -I '*.log|03-file-transfer*' --charset=ascii --noreport "${RND_WORKFLOW_RUNDIR}/" > "$OUT"
 
-cmp_ok 'cylc-ignore-tree.out'  <<__OUT__
+    cmp_ok "$OUT"  <<__OUT__
 ${RND_WORKFLOW_RUNDIR}/
 |-- _cylc-install
 |   \`-- source -> ${RND_WORKFLOW_SOURCE}
@@ -96,8 +108,10 @@ ${RND_WORKFLOW_RUNDIR}/
     \`-- install
 __OUT__
 
-contains_ok "${TEST_NAME}.stdout" <<__OUT__
+    contains_ok "${CWD}/${TEST_NAME}.stdout" <<__OUT__
 INSTALLED $RND_WORKFLOW_NAME from ${RND_WORKFLOW_SOURCE}
 __OUT__
-popd || exit 1
-purge_rnd_workflow
+
+    popd || exit 1
+    purge_rnd_workflow
+done