The Law on Capital Gains Tax
By an amendment introduced to the Income Tax Act by the Finance Act of 2014 Capital Gains Tax (CGT) was re-introduced in Kenya. The tax, which had been suspended in 1985, is chargeable on the whole of the gain or profit made on the transfer of property situated in Kenya – it’s the gain made that’s taxed, not the entire transfer value. The burden of declaring and paying the tax liability is on the beneficiary of the gain who, in the case of a transfer of property, is the transferor.
Administration of CGT is currently governed by the Income Tax Act and the Tax Procedures Act.
Computation of Capital Gains Tax
The rate of CGT is 5% of the net gain made on a transfer. The net gain is computed by deducting the adjusted cost of acquisition of the property from the transfer value.
The transfer value is the consideration for transfer of the property, that is, sales proceeds less incidental costs (such as legal fees, valuation fees, stamp duty payments and advertisement costs). The adjusted cost is the cost of acquisition or construction of the property and includes the legal and valuation costs incurred.
It is worth noting that Capital Gains Tax is a final tax and cannot be offset against other taxes payable by the transferor.
Exemptions and exclusions
The law exempts certain transactions from payment of Capital Gains Tax. These exempted transactions include:
- gains from property transferred by an individual where the transfer value is not more than Kshs. 3,000,000;
- gains from transfer of agricultural property having an area of less than 50 acres;
- income that is chargeable to tax under any other provisions of Income Tax Act;
- gains accruing to a company on a transfer of machinery;
- transfer of property in exchange for other property that takes place pursuant to a restructuring of a corporate identity involving one or more companies found by the cabinet secretary in his discretion to be in the public interest; and
- and gains derived from transfer of a private residence if the individual owner has occupied the residence continuously for the three-year period immediately prior to the transfer concerned.
In addition to exempted transactions, there are transactions that are referred to as excluded transactions, that is, transactions that are not considered transfers of property for purposes of imposition of Capital Gain Tax. They include:
- transfer of property for purposes of securing a debt or loan;
- transmission of property to heirs upon the death of a property owner;
- transfer by a personal representative in the course of the administration of the estate of a deceased property owner;
- vesting of a company’s property in the liquidator of that company by a court order;
- transfer by a trustee of property to a beneficiary on his becoming absolutely entitled thereto;
- transfer of assets between spouses or former spouses; transfer to immediate family as part of a divorce or separation agreement; and
- transfer of property to a wholly family-owned company.
The import of these exemptions and exclusions is that CGD is not payable on gains or profits made on the specified transactions. Nevertheless, the transferor of property must get approval from the Kenya Revenue Authority (KRA) to avoid paying CGT on these transactions. To obtain such approval, th transferor should make an application to the collector.
When is one required to pay Capital Gain Tax?
Paragraph 11A of the Eighth Schedule of the Income Tax Act (‘paragraph 11A’) provides that the due date for Capital Gains Tax is on or before the date of applying for the transfer of property at the Lands Office. Pursuant to this provision, KRA issued a public notice to the effect that, with effect from 1st October 2016, Capital Gains Tax would be required to be paid simultaneously with stamp duty on transfer of property.
The Law Society of Kenya (LSK) filed a constitutional petition (No. 39 of 2017) to challenge that requirement by KRA. The court eventually ruled that paragraph 11A is unconstitutional inasmuch as it limits the right to freely transfer property. We wait to see whether KRA will update its website and systems to allow payment of stamp duty independent of Capital Gains Tax.
Notably, a taxpayer to whom the tax applies may apply in writing to the Commissioner under section 33 of the Tax Procedures Act for extension of time to pay tax. If the Commissioner is satisfied that there is reasonable cause, he may allow an extension of time for payment of the tax or require the taxpayer to pay the tax in such instalments as the Commissioner may determine.
Consequences of non-payment and late payment of Capital Gains Tax
Non-payment of Capital Gains Tax is a criminal offence under section 107 of the Income Tax Act. In addition, KRA may recover the outstanding amount by suing the taxpayer under Section 39 of the Tax Procedures Act.
Late payment of Capital Gains Tax, on the other hand, attracts penalty interest at a rate of 1% per month or part of a month on the amount of tax remaining unpaid. The interest period commences on the date the tax was due and ends on the date the tax is paid. (section 38 of the Tax Procedures Act)
By the Real Estate team – Mboya Wangongu & Waiyaki