Funding a holiday home in Europe

Buying abroad? Liz Willis looks at mortgage arrangements in three popular countries.

Buying a timeshare in a holiday apartment or renting a villa for a couple of weeks at a time may lack appeal for GPs. If, however, you would like a property abroad that you can truly call your own and get to fairly quickly, why not investigate buying a second home in Europe?

The lucky few will be able to purchase outright, but the majority of GPs buying an overseas home will need to borrow at least some of the asking (and possibly renovation) price.

As a 'starter information pack' (you will also need to do your own research and get specialist professional advice) GP has looked at buying a holiday home on mortgage finance in three countries.

The first is Bulgaria, which joined the EU in January this year, and is one of the eastern European countries newly fashionable among second homeowners. The other two countries are France and Italy. In all three, arranging a mortgage in euros is usually fairly straightforward.

But what about Spain, hitherto extremely popular for second homes? The Spanish holiday home market is on the brink of collapse, according to the financial media. It may be wise to steer clear of Spain right now rather than risk losing your investment.

- Liz Willis is from the Medical Profession Advisory Division, St. James's Place Partnership, 07900 654401, liz.willis@sjpp.co.uk

Great valie in fashionable eastern Europe
Compared with western Europe, Bulgaria is cheap. You can expect to find a luxury beach apartment for £16,000 and will struggle to spend as much as £50,000 on a large house with a few hectares of land.

However, in this burgeoning new market, bribery and corruption can be a problem. It is vitally important to have English-speaking lawyers and representatives, such as local property agents.

Although Bulgarian mortgages can be arranged in 'new levs', the local currency, they are mostly in euros. You will need to pay around 10 per cent of the purchase price in cash as a reservation fee when signing the contract, plus a further 20 per cent before completion.

It is vital the contract is written in English and signed in front of a notary.

Individual non-Bulgarians cannot buy land, so you can end up owning just the bricks and mortar, plus the right to use the land the house stands on, which is owned by someone else. However, you can overcome this by setting up a Bulgarian-registered company (which costs around £600 to purchase the land and takes about two to three months) or by buying an apartment.

The lender's fees will be around 2 per cent of the price. Other fees, such as 'pre-qualification fees', local taxes and notaries' charges, are likely to total a further 3.5 per cent or so.

There are normally no estate agents' fees as they tend to work healthy commissions - and 20 per cent VAT - into the price.

Any rental income in excess of EUR3,500 a year the property generates for you is taxed as income at 24 per cent. Rental income is also subject to 15 per cent 'withholding' tax.

Capital gains tax (CGT) in Bulgaria is also 24 per cent but the UK and Bulgaria have a 'double taxation agreement'. This means you can be taxed in both countries, but in total will not have to pay more tax than you would have done if the liability had arisen in the UK in the first place.

Making a french connection
A good-sized house in France will cost from £50,000, while a home with a vineyard will set you back £300,000 or more.

Mortgages are arranged in euros with a 15-20 per cent deposit, excluding arrangement fees. To get a mortgage, the property must be habitable.

Remember, in France the initial contract is binding. Arrange for a survey to be done before signing any documents. Surveys are not common in France and you will probably need to have one carried out by a local architect or estate agent. However, as in the UK, the bank you borrow from will arrange a valuation.

If the property is on more than a hectare of land, then different regulations apply. Societes d'amenagement foncier et d'etablissement rural, agricultural bodies, have the right to pre-empt your purchase to preserve land they feel should remain in agricultural use.

Purchase costs can be substantial. Lenders' arrangement fees range from 1-1.5 per cent of the price. Completion of sale expenses will be up to a further 8 per cent, although significantly lower if you are buying a brand new property. Stamp duty is an average of 4.8 per cent of the declared value when you buy a property more than five years old. Newer properties are exempt but liable instead to 19.6 per cent VAT. However, some of these costs may be included in the price, so check.

There are different regimes for taxing rental income in France. For furnished property there is a 72 per cent flat rate deduction for expenses on incomes up to EUR76,000 (about £51,500) a year, with the remainder taxed at 25 per cent. Rules for unfurnished properties are different, so seek advice.

On assets worth over EUR76,500, you pay an annual wealth tax and, potentially, CGT when you sell. This can be 16 per cent on a new property, and 10 per cent after five years. There's no CGT to pay on properties held more than 15 years.

Resources

  • Overseas mortgage specialists www.baydonhill.com
  • Bulgarian mortgages www.bulgarianhomeloans.com
  • Italian property specialists www.casatravella.com

 

Pricey Italy still a safe bet
In Italy you will need to pay up to a 20-30 per cent deposit for a mortgage in euros. Prices vary from around £40,000 for a property to restore or a studio ski apartment to millions for a luxury villa.

As long as you purchase with professional help, buying property in Italy is a safe investment. Notaries will prepare the legal documents and carry out some searches, although they do not become involved until about a month before completion. Obtain independent legal advice from an English-speaking specialist Italian lawyer.

Add to the purchase price 10 per cent VAT on new property or 4 per cent if the property is the first home you have bought. Estate agent's fees are 3 per cent. A local surveyor or site foreman will carry out a structural survey. With notary fees, these will cost £330-plus.

Rental income is subject to 23 per cent income tax on up to £100,000 a year and 33 per cent above that. There is also a tax on properties that are not rented out. This is usually no more than 1 per cent of their value.

CGT is payable if the property is sold within five years.

Purchase costs may be on the high side in Italy, but you could be making a good investment that will rise in value in a stable market.

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