Capital Gains Tax (CGT) was reintroduced in Kenya through the Finance Act 2014, amending the 8th Schedule of the Income Tax Act Cap 470. CGT applies to the sale of immovable property or the transfer of shares for companies not listed on the Stock Exchange.
Tax Rates and Calculation
The Act imposes a 15% tax on net gains from the transfer of property, including shares, land, and buildings, located in Kenya. Initially, the CGT rate was set at 5% of the net gains upon the transfer of immovable property. However, the Finance Act 2022 increased the CGT to 15%, effective 1st January 2023. This 15% tax is a final tax, meaning the net gain is not subject to further taxation.
For example, if a company plans to sell a parcel of land in Nairobi County with a net gain of Kshs 3,000,000, the CGT payable would be Kshs 450,000 under the new rate. This represents an additional Kshs 300,000 in taxes compared to the previous rate.
Exemptions from Capital Gains Tax
The Income Tax Act exempts the following transactions from CGT:
- Shares in the stock or funds of the government, the High Commission, or the Authority established under the Organization or the Community.
- Shares of a local authority.
- A private residence occupied by the individual owner continuously for the three years immediately prior to the transfer.
- Property (land) with a transfer value of less than Kshs 3 million.
- Agricultural property with an area of less than 50 acres, situated outside a municipality, Gazette Township, or an area declared by the Minister as an urban area.
- Land adjudicated under the Land Consolidation Act or the Land Adjudication Act, transferred for the first time after registration under the Registered Land Act.
- Internal restructuring within a group that does not involve a third-party transfer (intra-group transfers).
- Property (including investment shares) transferred or sold to administer the estate of a deceased person, provided the transfer or sale is completed within two years of death or within an extended period approved by the Commissioner in writing.
What constitutes a transfer?
- If property is sold, exchanged, conveyed or otherwise disposed of in any manner (including by way of gift), whether or not for consideration;
- On the occasion of the loss, destruction or extinction of property whether or not a sum by way of compensation is received in respect of the loss, destruction or extinction unless that sum is utilized to reinstate the property in essentially the same form and in the same place within one year or within a longer period of the time approved by the Commissioner.
- On the abandonment, surrender, cancellation or forfeiture of, or the expiration of substantially all rights to property, including the surrender of shares or debentures on the dissolution of a company
Some allowable expenses for the purposes of CGT include;
- Cost of Acquisition/Construction
- Loan/Mortgage interest
- Cost of advertising to find a buyer
- Costs incurred in valuation of the property
- Legal fees
- Costs of enhancements.
How To Determine the Transfer Value/Selling Prices for the purpose of CGT
- Amount received for transferring the property; Sums received in return for the abandonment, forfeiture or surrender of the property.
- Amount received for the use of exploitation of the property eg rent
- Compensation received for damage , injury to the property or for the loss of the property
- Insurance policy reimbursement in respect of injury, or loss or damage to the property.
Way Forward
The tripling of CGT from 5% to 15% will result in higher taxes for developers, property owners, and investors upon the transfer of properties, especially when combined with the inflation-adjusted property prices. .
Talk to us: Call/Whatsapp/text: 0745 359397 ,Email: info@michroniaconsultants.co.ke