Everything you need to know about building societies

What is a building society and how does it work?

Many people ask themselves what building savings is and why it has such a strong tradition in the Czech environment. In essence, it is a long-term financial product that combines savings with a state contribution and the possibility of obtaining a home loan. It is therefore not just an ordinary savings account. Building savings are regulated by special legislation, namely the Building Savings Act, which lays down the rules for the operation of the system and the conditions under which the State provides support.

The client concludesa contract with the building society and undertakes to save regularly over a certain period of time. The basic commitment period is usually six years. At the end of this period, the saved money can be withdrawn or a loan can be applied for from the building society, which is often more advantageous than ordinary consumer loans. The advantage is stability and relatively low risk. The disadvantages can be limited flexibility and the fees charged by building societies.

People often think that building societies are automatically good for everyone. But the truth is more complicated. The benefit depends on how long you save for, whether you actually use state support and what terms you have in your contract.

State aid for building savings: when is it due?

One of the main reasons why building societies are so popular is the state support for building societies. This is because the state encourages people to build up a financial reserve for housing. The support works in such a way that if the client puts in a certain amount during the year, the state credits him with a percentage contribution up to a set limit. The amount of support has changed over time and always depends on current legislation. According to the current legislation, the state support for building savings amounts to 5% of the amount saved annually, but not more than on deposits of up to CZK 20 000 per year. The highest possible state support is currently CZK 1 000 per calendar year.

However,entitlement to state support is not automatic in the sense that you will always receive it in all circumstances. For example, if you terminate your contract early, typically before the end of the commitment period, you may lose the support. A very common problem is when a client terminates a building society before it was profitable and only finds out retrospectively that they have to pay back the support.

Another common risk is administrative error. The savings bank or the state may incorrectly assess whether the conditions have been met, or the payment of support may be delayed. In practice, there are also situations where a client has multiple contracts, which is restricted by law. The Building Savings Act stipulates that state aid can only be drawn once per birth number. If a client has multiple building savings contracts, he/she can only draw state aid to the extent provided for by law and must specify to which contract the aid is to be applied.

If you feel that you have not been awarded state aid correctly, you can defend yourself. You can make a claim to the savings bank or go to a financial arbitrator.

We canhelpyou assess whether the credit union’s actions were in line with the law and advise you on how to recover the state aid.

Termination of building savings and cancellation of the contract

Termination of a building society may seem simple at first sight. Often, the client says that he or she no longer needs the contract and wants to withdraw the money. However, it is the cancellation of building savings that is one of the most frequent sources of disputes and disappointment. Building societies set termination periods, fees and penalties in their contracts, which can take the client by surprise.

As a rule of thumb, if you terminate your contract before the end of the binding period, you will usually lose the state support for building savings and often have to return part of the contributions already credited. In addition, the savings bank may charge a fee for early termination or for maintaining the account until the date of termination.

Another complication is that the notice must comply with contractual and statutory requirements. If the client does not follow the correct procedure, the entire process may be prolonged or the savings bank may refuse to terminate the contract. A common problem also arises with child contracts where the parents have no idea who is the real owner of the money.

So if you are considering terminating a building society savings account, have the implications calculated in advance. A solicitor can help you avoid unnecessary losses.

Building society loan

In addition to the savings itself, the building society loan is also a key element. This is often presented as a cheaper alternative to a mortgage or consumer credit. Indeed, in some situations it can be advantageous, especially if the client meets the conditions and obtains a proper fixed-rate loan.

However, it is important to know that a building society loan is a special purpose loan, which means that you can only use it for housing needs. The savings bank has the right to ask for proof of purpose, for example, a renovation invoice or a purchase contract. If the client does not provide proof of purpose, the credit union can cancel the loan or demand the return of the benefits.

A common problem is also a bridging loan, which the client obtains before meeting the conditions for a regular loan. Bridging loans are more complex and often more expensive, as the client pays mainly the interest first and the principal later. Many people do not realise this fact and sign the contract without understanding the details.

There is also a legal risk if you take out a loan together with your partner and later split up. In such a situation, it is necessary to address who will bear the liability because the savings bank will always demand repayment according to the contract.

If a credit union offers you a loan, we recommend you check the contract legally first. We will explain what you are actually signing.

Building savings for children and inheritance

Building savings for children is a very common question. Parents set it up with the idea that it will provide a financial foundation for their child into adulthood. But legally the situation is more complicated. If the contract is in the child’s name, the child is the owner of the funds, not the parent. This means that after the child turns 18, he or she can dispose of the money as he or she sees fit, even if the parents had a different plan.

A further complication arises when parents divorce. One parent may request that the funds be used differently, the other may have a different opinion. If the child is the owner, the parents do not have automatic access to the money.

Inheritance is also a complex issue. Building savings become part of the inheritance process. People sometimes ask about inheritance tax on building society savings, but at present inheritance tax has been abolished. It may still be necessary to deal with the legal transfer of the contract and the settlement between the heirs. For minor heirs, the guardianship court often comes into play.

If you are dealing with building savings after the death of a loved one or setting up a contract for children, a lawyer can help you set everything up safely.

Building Savings and Taxes

Building societies cause a lot of confusion when it comes to tax because people often assume that they work in a similar way to a mortgage. In reality, however, building societies do not allow tax deductions. There is no tax relief for building societies or the ability to deduct deposits from the tax base. It is important to know, however, that from 2024 the previous rule that state aided building society savings were always automatically tax-free no longer applies either. In fact, the state support is now considered as so-called other income under Section 10 of the Income Tax Act and can be taxed at the moment it is paid to the client.

In practice, however, this does not mean that most people have to file a tax return immediately because of building savings. In fact, the tax will only apply in exceptional cases where the sum of this “other income” exceeds CZK 50,000 per year. Typically, then, only if the client terminates the contract and has a larger amount of state support paid out at once. The amounts credited to the account on an ongoing basis are for the time being only registered advances and only become actual income when paid out by the savings bank.

As regards interest on deposits, the regime remains the same as before: interest is subject to a withholding tax of 15 %, which is automatically deducted by the savings bank and paid to the State. The client therefore no longer reports the interest anywhere and does not report it on the tax return. In practice, this means that if the savings bank credits, for example, CZK 1,000 in interest, the client will receive only CZK 850, because CZK 150 will automatically go to tax.

Summary

Building savings are one of the traditional and safe ways to save money for the long term for housing or for the future, for example for children, and their operation is regulated by the Building Savings Act. The client enters into a contract with a building society, usually saves for a minimum of six years, and at the end of that time can withdraw the saved funds or use a building society loan, which is usually more advantageous than ordinary loans, but is special-purpose and must be documented for housing needs. A major attraction is the state support for building savings, but this is not automatically guaranteed – if the client terminates early, they may lose the support and be required to repay it, as well as face fees and penalties associated with cancelling the building savings or complications when terminating the building savings. Specific rules also apply to building societies for children, where the money is legally the child’s property and can be managed by the child once he or she reaches the age of majority, and a special situation arises in the case of inheritance, where the contract becomes part of the inheritance proceedings, although inheritance tax on building societies is not paid today. As regards building savings and tax, the client cannot claim a building savings tax deduction or any building savings tax credit, but the interest is automatically subject to a 15% withholding tax directly by the building society, so it is not included in the tax return. As the terms of contracts can be complex and disputes with the building society are no exception, it is worth contacting a solicitor to help avoid unnecessary losses and protect your rights when terminating, taking out a loan or dealing with state support.