Buying a Property in the Czech Republic

Why the Czech Republic?

As a landlocked communist country, what is now the Czech Republic was hardly a magnet for tourists. However, it is now a parliamentary democracy, a member of the European Union and one of the most stable and prosperous of the post-communist states.

Prague, the capital, with its blend of history and contemporary culture, has become a hotspot for city breaks. This new popularity and the availability of low-cost flights have set the scene for a burgeoning international property market.

We hope this guide will help you decide whether to consider the Czech Republic for your property purchase. There are many research tools to help you, including television and radio programmes, magazines, the internet, property exhibitions, and estate agents in both the UK and the Republic.

The Czech property market

Residential property in the Czech Republic is currently considered by many to offer one of the safest investment opportunities in Central and Eastern Europe. Though rising rapidly, prices represent good value in comparison with some of the traditional markets for UK second home and investment property purchasers.

Several factors have contributed to market growth, including EU membership, strong economic performance, the country’s location in the heart of Europe and a low supply of quality housing in relation to demand.

In Prague, prices for modern apartments are increasing at 20 per cent per year, and rental demand is strong. Gross rental yields are generally between 7.5 per cent and 8.5 per cent.

Properties are sold either OV (private ownership) or DV (cooperative ownership).

Czech Republic: Popular property locations

As in other former communist countries, the international property market is developing slowly, rippling out from the capital.

Prague is undoubtedly still the number one Czech Republic location for foreign investors, being the country’s leading industrial centre and one of Europe’s most beautiful and historic cities. It now attracts more than three million tourists each year, and that number is constantly increasing.

However, secondary markets are now emerging in other key urban areas with a high proportion of professionals and expatriates, such as Brno.

As you would expect, there are huge variations in price. For example, prices in Brno are approximately a third of those in Prague. In general, the further an area is from Prague, the cheaper it will be.

Prague

Set on the banks of the Vltava River, Prague has captured the imagination of visitors down the ages. Famous for its old-world charm, architectural treasures and vibrant musical and artistic life, Prague is also very much a modern European metropolis, full of energy, with a lively street scene.

As in any major city, prices vary with area. Properties are available from as little as CZK1,800,300 (about £44,000), but the average cost of a two-bedroom apartment is CZK6,300,800 (approximately £153,000). Predictably, areas closest to the centre are the most expensive, and better deals are to be found further out.

More than 20 UK airports provide flights to Prague International Airport. EasyJet offers low-cost services from Gatwick, Stansted, Bristol, Newcastle and Nottingham East Midlands.

Brno

Brno, the Czech Republic’s second largest city, is the economic centre of the Moravian region, the population of which is around two million. Although it is a cosmopolitan centre, Brno retains an authentically Czech atmosphere. It boasts some excellent museums and the Villa Tugendhat, one of the most significant examples of Modernist domestic architecture in Europe.

Over the past 10 years, economic growth has averaged more than 9 per cent per annum, a trend that looks set to continue, owing to significant foreign investment; large multi-nationals are flocking to make the most of a highly educated, skilled workforce. Not surprisingly, demand for rental properties is strong.

Ryanair flies direct from Stansted to Brno. Alternatively, you can take a connector flight from Prague.

Buying a property

Since the Czech Republic joined the EU, regulations for foreign ownership of property and the purchase process have both been streamlined and simplified. Before that, most foreign nationals had to establish a Czech limited company (known as an SRO) in order to own property.

Now, citizens of EU countries can buy residential property freely. Non-EU citizens, and those who are not citizens of a country with which the Czech Republic has a Favoured Nation agreement, must still establish an SRO.

It is often recommended that property should be purchased through a company whatever the buyer’s circumstances, since the company structure provides a useful tax and liability shelter, but it is important to seek professional advice appropriate to your personal circumstances.

The purchase process

Once an offer has been accepted, a deposit is paid and held in an escrow account until the purchase contract is signed. The buyer’s lawyer then carries out the searches. Providing the results are satisfactory, seller and buyer sign the contract. The documentation is then forwarded to the Land Registry for registration transfer, a process that can take several months.

In the meantime, the balance of the purchase price is lodged in an escrow account. Only when the registration process is complete are the funds and deeds transferred.

Allow around 8–10 per cent of the purchase prices for taxes and fees. Transfer tax (currently 5 per cent) is payable by the seller, but the buyer becomes liable if the seller fails to pay.

Financing your purchase

When working out how to finance your purchase, consider all the options. Paying cash, if you can afford to, is often recommended, but you may not want to tie up a relatively large sum in this way.

The other options are remortgaging your UK home or arranging a mortgage on your new property through a UK or Czech lender. Remortgaging offers the easiest solution. Releasing equity in a UK home means that the second home can be purchased for cash, without the need for another mortgage. However, this may only be feasible if you own your first home outright.

Several UK mortgage providers will lend funds of up to 80 per cent of the purchase price for second home purchase over, typically, a 15-year term.

Getting a mortgage in the Czech Republic

In the past, cumbersome and time-consuming legal procedures for dealing with defaulters made Czech lenders reluctant to grant mortgages, but that is now changing rapidly. Mortgages are now becoming more freely available, even to foreign purchasers.

Proof of income is required. The maximum loan is generally 80 per cent of the property’s value, and the maximum term 25 years, though there are exceptions.

If you are considering a mortgage in a foreign currency, ensure you seek expert advice. For example, euro mortgages, which are tied to the rate set by the European Central Bank (ECB), currently lower than the Bank of England base rate, may seem an attractive option. However, because of the volatility of the currency markets, you risk getting your fingers burned.

Taxation

The UK has a double taxation treaty with the Czech Republic; tax is paid in one country or the other, not both.

The Republic’s personal taxation system is progressive; 2006 rates are 12–32 per cent. Capital gains tax is payable on profits made on, for example, property sales. However, gains made on the sale of one’s principal residence, provided it has been owned for at least two years, are exempt, as are those made on a property that is not one’s principal residence if it has been owned for more than five years. CGT can be avoided by purchasing the property through a limited company (see Buying a Property).

Inheritance tax and gift tax are levied at from 1 to 40 per cent, depending on value.


Personal taxation: non-residents

Foreign nationals living and/or working in the Czech Republic on a temporary basis are considered non-residents and taxed only on Czech-sourced income. This includes rental income, interest payments, dividends, etc.

Personal taxation: residents

Foreign nationals who have a permanent home in the Czech Republic, or who spend more than 183 days per calendar year there, are considered tax residents and taxed on their worldwide income. The 183 days need not be consecutive.

Property taxes

The annual property tax is usually minimal, and varies depending on the classification of the building. Tax on residential properties is less than that on commercial ones.

Money matters

The Czech Republic’s currency is the crown, or koruna (CZK). The current exchange rate is CZK41.31 = £1.00 sterling.

Standard banking hours are 8:00 am to 6:00 pm, Monday–Friday. ATMs are increasingly widespread.

Foreign currency, including travellers’ cheques, can be exchanged at all bank branches, bureaux de change and large hotels. Major credit cards are accepted in hotels, restaurants and larger shops, though cash payment is expected in smaller ones.

The import and export of local currency is limited to CZK200,000 (£4,865.15). There are no restrictions on the import or export of foreign currency.

Those considering moving money overseas should consult a financial adviser or foreign exchange risk expert, who can advise on ways of reducing currency fluctuation risks.

Passports, visas and residency

Passports and visas

UK citizens with passports endorsed ‘British Citizen’ can visit the Czech Republic for up to 180 days without a visa. All others should contact the Czech Embassy to determine visa status.

Passports should be valid for the duration of the visit, and in a presentable state. Holders of passports that are in poor condition may be refused entry. Children aged 15 and above must have their own passport.

Residency

EU citizens can apply for a temporary residence permit if they intend to stay in the Republic for longer than 90 days. While a permit is not mandatory, it can provide a useful means of identification. The temporary permit is valid for three years, after which time the holder may apply for a permanent one.

The Czech economy

Since 2000, the Czech economy has gone from strength to strength. Exports and output growth have increased, while interest rates and inflation have been reduced. The improvement has been driven by several factors, including EU membership, high levels of foreign direct investment and consumer spending.

The country’s main trading partners are Germany, Slovakia, Austria, France and the UK. Among its key manufacturing industries are machinery (particularly cars, tractors, railway equipment, etc), sheet glass and textiles.

A number of international companies have regional offices in the Czech Republic and some are even headquartered there. Shell, Tesco and Unilever are all investing heavily.

The Republic is preparing to join the euro in 2010, but must first bring public spending under control.

Communications

Telephone

The international access code for the Czech Republic is 420. The outgoing code is 00 followed by the relevant country code (for example, 0044 for the United Kingdom).

Landlines are difficult and costly to obtain, and expensive to run. Most Czechs do not have them, using mobile phones instead. Mobile services, provided by Eurotel, Oskar and T-Mobile, are efficient, but currently quite expensive. Coverage is excellent throughout the country.

Internet

High-speed Internet services are increasingly available, though coverage is not yet universal. Cybercafés are widespread, and becoming more so all the time.

Post

The postal service, though improving, is generally slow and not very reliable.

And finally …

Buying a property abroad is a major decision, and one that must be researched thoroughly. First, decide what you want from your property (which will vary according to how you intend to use it), and then do as much fact finding as possible, including visiting your chosen destination at different times of year. Establish your budget, and stick to it.

Proceed with caution, remembering that, sadly, there are in every country people who will take advantage of those they regard as wealthy foreigners. Never sign any document until you are satisfied that you fully understand what you are committing yourself to.

It is essential to obtain professional advice and guidance tailored to your individual circumstances, especially in areas like property purchase, potential rental returns, taxation and mortgages.

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