What is Capital Gains Tax (CGT)?CGT is a tax imposed on the gains which accrue on transfer of property situated in Kenya, on or after 1st January 2015 whether or not the property was acquired before 1st January 2015. A transfer of property occurs when property is sold, exchanged, conveyed or otherwise disposed of in any other manner (including by way of gift). Further, a transfer is said to have occurred on abandonment, destruction, surrender, cancellation, forfeiture of, or upon expiration of the substantial rights of the property, including the surrender of debentures or shares on the liquidation of a company.
Computation of CGT
The rate of CGT is 15% of the Net Gain. Net Gain is Sales Proceeds minus the Acquisition and Incidental Costs of the Property.
Let’s take a look at a hypothetical situation to put the above in context:
If one bought a parcel of land 3 years ago at Ksh. 5,000,000.00, with incidental costs of Ksh. 300,000.00. Thereafter, they developed a block of apartments on the property valued at Ksh. 40,000,000.00. Now they desire to sell it for Ksh. 90,000,000.00 and the process of sell and transfer will cost them incidental costs (professional fees for an advocate, surveyor and agent; advertisements) of approximately of Ksh. 2,000,000.00.
Then, the computation for CGT will be as follows:
Net Gain = (Transfer value – Incidental Costs on Transfer) – Adjusted Cost (Acquisition Cost + Incidental Costs on Acquisition + Any enhancement Cost).
Thus; (90,000,000 –2,000,000) – (5,000,000 +300,000+40,000,000) =42,700,000.00
Therefore: 15/100 × 42,700,000.00=6,405,000.00
It should be noted that with the previous CGT rate of 5% one would have paid Kshs. 2,135,000/= but now with the current CGT rate of 15% they will pay a triple amount of Kshs. 6,405,000/=.
Payment of Capital Gain TaxCGT is payable by the transferor on or before the 20th day of the following month in which the transfer of the property is effected. The payment is initiated by the transferor raising a CGT acknowledgement slip via the KRA i-tax portal. Thereafter, one is required to present the acknowledgement slip at any KRA appointed bank with the tax due to complete payment. It should be noted that the slip expires within thirty (30) days.
Exemptions on Capital Gains Tax
The following transactions are exempted from payment of CGT in Kenya:
- a private residence if the individual owner has occupied the residence continuously for the three-year period immediately prior to the transfer concerned.
- Income that is taxed elsewhere as in the case of property dealers
- Issuance by a company of its own shares and debentures
- Transfer of shares listed on the Nairobi Securities Exchange
- Transfer of property for the purpose only of securing a debt or a loan
- Transfer by a creditor for the purpose only of returning property used as security for a debt or a loan
- Transfer by a personal representative of any property to a person as beneficiary in the course of the administration of the estate of a deceased person.
- Transfer of assets between spouses;
- Transfer of assets between former spouses as part of a divorce settlement or a bona fide separation agreement;
- Transfer of assets to immediate family;
- Transfer to a company where spouses or a spouse and immediate family hold 100% shareholding;
In the Finance Bill Report 2022, the Departmental Committee on Finance and National Planning and a majority of the stakeholders proposed that the CGT rate of 15% be revised t0 a lower rate of 10%. The stakeholders argued that Kenya is yet to adopt an inflation adjustment mechanism that would capture the present market value of property and that the increased rate would negatively impact Kenyan as an economic hub and investment destination for many people all over the world.
Notwithstanding the Committee’s and stakeholders’ recommendations, the Finance Act, 2022 adopted the rate of 15% with effect from 1st January 2023. As it stands, the CGT rate is comparatively high compared to Uganda and Tanzania’s rate of 10% but relatively low compared to Rwanda’s rate of 30%, Botswana’s rate of 25%, Egypt’s rate of 22.5%, and South Africa’s rate of 18% for individuals and 21.6% for Companies.
The increased CGT rate of 15% will see the Government greatly benefitting from the increased revenue collection and property owners, investors and developers having to dig deeper into their pockets to pay more tax on the net gains accrued from the sale of their properties.
It is our considered opinion that the real estate market will see a decrease in supply of property as owners may shy away from paying the increased tax and choose to hold onto their properties. Investors who were looking into investing in real estate may also be discouraged from investing. Further, prices of properties in Kenya are about to shoot through the roof as proprietors will factor in the increased tax rate as such leading to a decreased demand for property.
Lastly, they will be an overall negative impact on the economic growth of the real estate market in Kenya which is among the top fastest growing in the African economy and other related industries such as construction, banks and insurance companies.