Buying a Property in Bulgaria

Why buy property in Bulgaria?

Only a few years ago, buying a property in Bulgaria was seen as exotic and something of a risk. The property market was immature; the country was emerging from the disadvantages of being a former Communist state, and no-one was quite sure of how long the property market would continue to grow. The seaside resort of Sunny Beach was being mooted as one of the biggest new tourist destinations.

At the time, property was available off-plan for somewhere around £20,000 in the new resorts on the Black Sea coast. Things have changed somewhat since then. Bulgaria has become part of the European Union; the property market has seen unprecedented growth and the focus of British buyers has shifted away from the Black Sea coast to the ski resorts and the capital, Sofia.

As the first off-plan developments have now come ‘on-stream’ in the resorts and are accepting short-term tenants, the next couple of years will prove how much the property market and the new tourist trade will make a difference to the country. Sofia and the major towns are developing and modernising rapidly, and in some cases the infrastructure is struggling to keep up with the rapid growth in the property supply.

In common with many Eastern European countries, Bulgaria has found it’s fledgling free-market economy ill-equipped to deal with the global recession that has come in the past six months. An oversupply of property in some areas was already putting pressure on the market, and the result has been an annual fall in property prices across the country of 8.4 per cent, according to figures from the National Statistics Institute. Some areas, such as Bourgas, registered a rise in prices across the whole year, but trading conditions are expected to remain tough and further price drops are expected into the final quarter of 2009.

Popular locations - an overview

Bulgaria was predicted to be the next big thing in the tourist market in the UK, particularly the Black Sea resorts of Varna, Bourgas and Sunny Beach. Tourist numbers from the UK doubled in 2005 but the short summer season has seen this growth stutter a little. At the same time, the growth in the middle classes in Russia opened a new front in the battle for rental occupants with the Black Sea resorts becoming a popular destination for Russia’s new middle-management classes. The global financial recession has slowed this growth for the time being, but once the economy recovers Bulgaria should be in a position to attract tourists from Europe and Russia.

Those who prefer their holidays a little cooler will want to head to the ski resorts of Borovets and Bansko in the Pirin Mountains, an hour or so from Sofia. The ski runs are of good intermediate level standard, and the mountain scenery even better, in what is a World Nature Heritage national park. Borovets, near to the Rila Monastery, in particular, has character aplenty.

Sofia: Capital of Bulgaria

Sofia is the country’s largest city and home to its major museums, administration and government. The most Westernised of Bulgaria’s cities, with the exception of the tourist resorts, Sofia has only recently become a focus of significant foreign investor interest. Accession to the EU, along with greater accessibility, has seen the city become more ‘on radar’ over the past 18 months.

SW Bulgaria: Mountain region

Bansko, located at the foot of the Pirin Mountains and its national park, attracts visitors thanks both to its ski slopes and to its cultural monuments, museums and murals. This is the region of choice for those who prefer the real Bulgaria – yes, some people claim that much of the country is already being spoilt by rich Westerners! Check out Borovets, the oldest and largest ski resort in Bulgaria.

Bulgaria's Black Sea coast

The site of a construction boom unprecedented in Bulgaria’s history, the Black Sea coast is a stunningly naturally beautiful region. Sandy beaches line the shores of the warm sea against a backdrop of new apartment blocks, particularly at the modern Sunny Beach resort. The characterful old towns of Varna and Bourgas offer a cultural diversion, however temporary. The property market on the Black Sea coast has suffered the most from oversupply and lowers than expected tourist numbers, and this is where prices have dropped most significantly.

Property purchase process, costs and fees

The purchase process

Bulgaria’s system of property purchase, though relatively straightforward, is different from the UK’s. It is essential to use the services of an independent English-speaking solicitor.

To begin with, it is quite common for both buyer and seller to pay the estate agent for their work in bringing them together. Fees may be as much as 6 per cent of the purchase price, split 3 per cent each between the two parties. Often, this practice will only be enforced when buying an older property and not a new build, when, in all likelihood, you will be negotiating with, and buying from, a UK agent and/or developer.

Another significant difference, when buying a house with land rather than an apartment, is that non-nationals are not permitted to own land. Therefore, it is necessary to form a limited company in Bulgaria and register yourself as a company director. Forming a limited company is straightforward, taking around four weeks and costing €600. These regulations are likely to change in the near future, following Bulgaria’s admission to the EU, as one of the EU’s tenets is that property and land ownership must be open to all.

Thereafter, the buyer’s solicitor will draw up a preliminary contract of sale, at which stage the buyer will be expected to lodge a 10 per cent deposit. The solicitor will then check the property’s title, and, assuming everything is in order, the purchase price balance, land tax and notary fees, in total amounting to approximately 5 per cent of the purchase price, will fall due for payment. The title deed will then be processed, and in due course the new owner will receive his papers of legal ownership.

Costs

Several fees and taxes are payable when buying property. Budget for 4–5 per cent of the purchase price. Costs may include:

• Transfer fees: 2–2.5 per cent
• Notary fees: 0.5–1 per cent
• Legal fees: 1–1.5 per cent
• Surveyor’s fee (optional)
• Mortgage fees (if applicable)
• Foreign exchange costs (if applicable)
• Estate agent’s fees (if applicable)

Mortgages

Although mortgages have been available in Bulgaria for a couple of years now, the industry really is still in its infancy. The range of products and the flexibility of terms that are considered the norm in the UK just aren’t available in Bulgaria, and lenders are still charging large amounts for the privilege of having a mortgage in Bulgaria. Generally, the maximum loan will be 70 per cent of the property’s value, leaving the buyer to find a 30 per cent deposit, and the interest rate will be in the region of 6–7 per cent, plus an administration fee of 1–1.5 per cent. Some lenders are now offering 80 per cent LTV financing, though the global recession has made it harder to source mortgages easily in Bulgaria.

Therefore, and considering the relatively cheap price of property, a buyer may well decide their best option is to raise equity in their UK property – to buy the place in Bulgaria with cash, effectively. Should raising equity (i.e. increasing the mortgage on your UK property to free up cash) be an option for you, simply speak to your current UK mortgage lender, who will advise you whether or not it will raise your mortgage loan, thus enabling you to draw out cash to buy abroad. Be sure to ask if there is a charge for the transaction.

Also ensure you pay attention to how you exchange your currency when going through the process of buying a property in Bulgaria. Using your High Street bank for this process could potentially cost you thousands of pounds in both commission and less-advantageous exchange rates. Specialist currency houses are geared to providing this service to overseas property buyers, and offer a range of products that will, in the vast majority of cases, save money over the mainstream banks.

Taxation in Bulgaria

The annual income tax return is due by 15 April each year, and tax owed must be paid within 30 days of its submission.

Personal taxation: non-residents

The UK has a double taxation agreement with Bulgaria. Under Bulgarian tax regulations, a foreign national who is resident in a state with which Bulgaria has signed such an agreement, and who has earnings in Bulgaria, is subject to taxation in Bulgaria. After the tax has been paid, the foreign national may apply for a refund of the difference between the amount paid and the amount due under the relevant double taxation agreement. Be sure to check the rules once Bulgaria joins the EU.

Non-residents, therefore, are subject to tax on rental income earned from property in Bulgaria. Tax is currently levied at 10 per cent, after deduction of allowable expenses.

Capital gains tax (at 15 per cent) may apply in certain circumstances, for instance if a property is sold at a profit. However, there are some exemptions in place of which a qualified tax adviser will be able to inform you.

Personal taxation: residents

For tax purposes, a foreign national staying in Bulgaria for more than 183 days during a calendar year (1 January to 31 December) is considered a resident. The 183 days need not be consecutive.

Bulgarian residents are taxed on the total amount of worldwide income they receive during the calendar year. There are no personal allowances for spouses and dependants. There are allowances for lower incomes, but these do not amount to the same kind of exemptions that are found in the UK.

Income tax rates for tax residents could formally have amounted to up to 24 per cent, but since 1st January 2008 a flat rate of 10 per cent has been in place.

In the appropriate circumstances, residents may be liable for capital gains tax. There is no wealth tax in Bulgaria, and inheritance tax was abolished in 2005.

Local taxes

Annual property taxes are low in comparison with those paid in the UK – in the region of 0.15 per cent of the declared value of the property (i.e. £7.50 on a property valued at £50,000). The figure may vary, depending on the region and level of services provided.

Should the property be in a residential complex (for example, an apartment block), an owner can expect to pay a contribution to the Housing Association of approximately £200 per year, which provides for 24-hour security, cleaning, swimming pool maintenance, lighting and gardening.

Money matters

Bulgaria’s currency is the lev (plural leva), often written as Lv or BGN. The current exchange rate is 1 lev = £0.45 sterling. Conversion to the Euro is planned for 2010, provided the economic conditions are met.

Opening a bank account in Bulgaria is straightforward, on presentation of a valid passport. To open an account, you will be required to make a deposit. Bureaucracy in Bulgaria is notoriously slow, so be prepared to wait and be patient.

The import and export of Bulgarian currency to the value of 8,000 leva (approximately £3,611) is allowed without declaration, but amounts greater than this must be declared, as must foreign currency in excess of $1,000 US (approximately £663).

Passports, visas and residency

UK passport holders do not need a visa to visit Bulgaria for a period of up to 30 days in a six-month period. Passports should be valid for the period of intended stay. From 1st January 2006, all children entering Bulgaria have been required to have their own passports.

Residency

At present, British citizens intending to live in Bulgaria must apply to the Ministry of Internal Affairs for a long-term residence permit. Providing the applicant has the means to support themselves and meet other qualifying criteria, a permit for up to one year may be granted, which thereafter should be renewed by application annually. After five years, the holder of a long-term residence permit can apply for permanent residency.

Again, the rules pertaining to residency are likely to change as the country adapts to being part of the EU.

Work permits

Those intending to work in Bulgaria must have a work permit as well as a residence permit. The permit must be obtained before you arrive; it is not permissible to stay in Bulgaria while a work permit is being processed. If you bring dependent family members with you, do note that they do not automatically have the right to work in Bulgaria.

The Bulgarian economy

Driven by both domestic consumption and export, Bulgaria has recorded average economic growth of 4.2 per cent for 1998–2003, with real GDP per capita surpassing its 1989 level for the first time in 2003. The figures were significantly higher than ‘established’ Western economies’ GDPs. Since 2004, growth averaged more than six per cent, but recent economic conditions are likely to see this growth slow, stop, or even reverse to some extent.

Privatisation has been completed in the banking sector, and is underway in other sectors, as is required if the country is to join the EU.

The country’s turnaround from a nationalised economy, under which it laboured from the Second World War until 1989, when communism was overthrown, has been protracted. Characterised by delays, inefficiencies, and corruption, it is only in the past half decade that Bulgaria has begun to understand, accept and adopt free-market mechanisms significantly. Reports of irregular practices continue to emerge, even though the rest of the EU made tackling corruption one of the main conditions of entry for Bulgaria in January 2007. Although the government has repeatedly committed itself to continuing to fight the corruption that is part of everyday life in Bulgaria, the possibility of EU sanctions is still in the background and should therefore be judged to be a lack of forward movement and reform.

And finally...

Bulgaria offers great opportunities for Britons looking to buy a property abroad for personal use, while the market for investment property has been less successful in recent months. It’s still wholly possible to buy a studio apartment for not much more than £50,000, but be sure to adjust your expectations to accommodate a country whose infrastructure and communications (including roads, telephones and so on) are not as advanced as those we are used to in the UK – although they are modernising rapidly, and will continue to do so, having joined the EU in 2007.

Also, bear in mind that, at present, there are not many airlines flying to Bulgaria, and that flights can be expensive. This is changing rapidly and the airline market is opening up to low-cost carriers and charter flights alike. Additionally, buying a property, while not radically different to doing so in the UK, does have its local idiosyncrasies – for example, the buyer, as well as the vendor, may be expected to pay a fee to the estate agent. Therefore, to ensure a trouble-free purchase, engage the services of an independent English-speaking lawyer, and take advice on tax issues, mortgages and foreign exchange.

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