Save 4% on all Czech property purchases

Expert Corner with CERES Group

Few people are aware of the implications of the upcoming VAT changes which will be effective as of January 1st 2008. The key one for new build buyers to be aware of is that VAT will increase on the majority of units from its current rate of 5% to the new rate of 9%; hence any payments which haven’t been made by December 31st 2007 will incur an additional 4% VAT charge to the end buyer.

Unlike how other real estate companies are advising their buyers, this doesn’t necessarily mean that you should rush to make as many payments by December 31st 2007. The reason for this is that it has not yet been clearly defined on what base the VAT will be calculated.

Currently, a property is taxable according to when the property is registered in the cadastre (Land Registry), which typically only happens after the final purchase contract (on the completion of the project). This means that even if you make all your payments before the VAT increase, the applicable VAT may still be the higher VAT (that which is applicable when the property is finished).

However, there is also the possibility that the definition will be altered to the date of payment made. In such a case, this means that buyers would ideally be looking to pay as much of their purchase by the end of the year to save having to pay this extra 4%. This can be done in a number of manners:

1. If you are at Future Purchase Contract stage, it is advisable to aim to pay your exchange amount prior to December 31st 2007.
2. If you have been approved for a 100% mortgage with Simply Mortgages, we can negotiate on your behalf to transfer as much of the payment to the developer as possible prior to December 31st 2007. If the building is under construction, then typically you would be eligible to draw down up to 50% of the facility. However, this also means that you would then need to begin the monthly mortgage repayments on this amount and hence you would need to calculate if it is worth your while or not.
3. If you are planning to pay cash for the full amount of the property value, our recommendation would be pay this amount before December 31st 2007.

In our opinion, the 4% increase is not likely to affect bank valuations of a property as they provide valuations on the net value. This means that if you have been granted a 100% mortgage on a property which is due for completion in 2008, you will not have to worry about this leverage being dropped to 96% as of the start of next year. However, your total loan amount will increase by 4%, meaning that your monthly repayments will also increase.

It should also be noted that VAT increases do not affect resale purchases/sales from individuals selling their premises, as individuals do not apply VAT to the sale of the property. It may affect some resale purchases if purchasing from an SRO, although in most scenarios not.

Before you make any decisions, we suggest that you consult with either a mortgage or tax advisor to find out the latest situation with regards to the proposed VAT changes.

This piece was contributed to by Jan Urban, Managing Director of Simply Mortgages.

Source: CERES Group Property Report, November 2007.

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© PropertyIndex.com 2007 | Last Updated: 05 December 2007