Changes keep rocking the property industry in Kenya. The latest being on 21 June 2022, when Kenya’s President assented into law the Finance Act, 2022 (the Act).
The Act amended various tax laws including the Income Tax Act (ITA), The Value Added Tax Act, 2013 (VAT Act), Excise Duty Act, Tax Procedures Act, 2015 (TPA), and the Miscellaneous Fees and Levies Act. The Act also provides for other miscellaneous amendments to the Insurance Act, Retirement Benefits Act, Capital Markets Authority Act, Public Roads Toll Act among others.
In this blog, we will be looking at how the Finance Act of 2022 will affect property ownership in Kenya, especially when selling, the stage where Capital Gains Tax is due.
First things first, let us define what Capital Gain Tax is.
Capital Gains Tax (CGT) is a tax paid on the Net Gain when a property (land, share or buildings) is sold. Net Gain is Sales Proceeds minus the Acquisition and Incidental cost.
In simpler terms, it is a tax you pay on the gain you make (the selling price less purchase price and the costs incurred up to the time of the sale). And its paid by the seller.
Before the Finance Act 2022, the rate for CGT was 5%, but it is now at 15% (the effective date being 1st of January 2023).
Let us look at a hypothetical situation to demonstrate what this really means:
If you bought a plot of land 5 years ago for Ksh. 10,000,000.00, with incidental costs of an additional Ksh. 500,000.00 and developed a block of apartments on it for another Ksh. 40,000,000.00 and now sell it for Ksh. 75,000,000.00 in a process that costs you approximately Ksh. 8,000,000.00, this is what your capital gains tax would look like:
First, we work out the net gain
Net Gain = (Transfer value – Incidental Costs on Transfer) – Adjusted Cost ( Acquisition Cost + Incidental Costs on Acquisition + Any enhancement Cost)
So: (75,000,000.00 – 8,000,000.00) – (10,000,000.00+500,000.00+40,000,000.00) = 16,500,000.00
In current rates of 5% capital gains tax, you would pay Ksh. 825,000.00.
When the new law takes effect on the 1st of January 2023, you will have to fork out Ksh.2,475,000.00 – a very big jump to say the least.
There are some allowable expenses that you can factor in while calculating your CGT:-
Some allowable expenses for the purposes of CGT include:
- Loan/Mortgage interest
- Cost of advertising to find a buyer
- Costs incurred in valuation of the property
- Legal fees
- Costs of enhancements
Not all Capital Gains are taxable, according to KRA, there are some exemptions.
Exemptions on Capital Gains Tax
- Income that is taxed elsewhere as in the case of property dealers
- Issuance by a company of its own shares and debentures
- 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
- To a company where spouses or a spouse and immediate family have 100% shareholding
- A private residence if the individual owner has occupied the residence continuously for the three-year period immediately prior to the transfer concerned
- Sale of land by individual where the proceeds is less than Kshs. 3 million
- Agricultural land that is less than 50 acres
- Transfer of securities by a body expressly exempted under the Income Tax Act
How do I pay for Capital Gains Tax?
- CGT is due on or before transfer of property but not later than the 20th day after the transfer
- Payment should be initiated online via iTax
- The modes of payment include cash, cheque or RTGS
- After initiating payment, you will receive a payment slip
- Present the payment slip at any KRA appointed bank with the due tax to complete payment
- Note: The payment slip expires within 30 days.
If you are a small time player in the property industry, meaning you are transacting on property below Ksh. 3,000,000.00 in value you have nothing to worry about. If you are selling agricultural land, less than 50 acres, you can breathe easy.
Anybody else transacting in higher property values, or agricultural parcels bigger than 50 acres should perhaps take up yoga and breathing exercises to so as to be ready to write the CGT cheque…
To find out more on How to pay Capital Gains Tax, visit KRA’s website on this link.