The purchase of land or property is capital intensive and tax compliance is vital.
Tax implications to the buyer
The buyer is required to pay stamp duty on the acquisition of land. The stamp duty is calculated at 4% of the value of land while a 2% applies in instances where the land is located in other areas.
Stamp duty is based on the value ascertained by a government valuer. This is done in order to avoid instances where land is grossly understated in order to pay less stamp duty.
Exemptions from stamp duty include:
- Transfer of Land to charitable organizations as gifts
- Transfer between spouses
- Transfer of family land to the members on the demise of the registered family member or to a company wholly owned by the same family.
- Transfer of land between a holding company and its subsidiaries where the holding company owns not less than ninety percent (90%) of the shares of the subsidiary
Tax implications to the seller
The seller pays Capital Gains Tax (CGT) or corporation tax on the income depending on the core business carried out by the seller.
Corporation Tax is applicable on the sale of land by a real estate company whereby ;
- The land is held for a period with the objective being to increase the land
- Selling the land to make a profit constituted trade thus is the normal course of business operations
Capital Gains Tax was re-introduced in Kenya with effect from 1st January 2015 and is levied on the transfer of property situated in Kenya.
CGT is a final tax payable by the seller and is calculated at the rate of 5% of the gain. The gain is determined as the consideration/selling price, less the adjusted cost of the property. The adjusted cost is determined as the initial cost of purchase and includes any other incidental costs such as the costs incurred in improving the land or building, cost of advertising, cost of professional services of any surveyor, valuer, agent or legal adviser.
Exemptions from Capital Gains Tax include:
- Income that is taxed elsewhere (subjected to corporation tax)
- sale of land by an individual where the proceeds are less than KES 3 million
- disposal of property for purpose of administering the estate of a deceased person
- transfer of property between spouses as part of a divorce settlement.
Point to Note :
The payment of tax attracts a one-off penalty at 5% and accrues at a rate of 1% per month