Impact of Tripling Capital Gains Tax on Property Sales in Kenya Effective January 1, 2023

The Finance Act of 2022 amended the Income Tax Act, increasing the rate of capital gains tax (CGT) from 5% to 15%, effective January 1, 2023. This change impacts property transfers in Kenya, applying to properties acquired on or before January 2015.

What is Capital Gains Tax?

Capital Gains Tax is imposed on the transfer of property, which includes sales, exchanges, conveyances, or other dispositions of property. It also covers the destruction, abandonment, surrender, cancellation, or forfeiture of property. Examples of properties subject to CGT include land, buildings, securities, and shares.

Determination of CGT Rate

The rate of CGT is determined by the specific circumstances of the transfer. For instance, a firm certified by the Nairobi International Financial Centre Authority that invests KES 5 billion in Kenya and transfers the investment after five years will be subject to the rate effective at the time of investment. If the investment was made before the CGT rate increase, the firm would still pay the previous rate of 5%.

Allowable Expenses for CGT Calculation

Allowable expenses when computing CGT include costs related to the transfer of property such as:

Loan/mortgage interest
Advertising costs
Valuation costs
Legal fees
Enhancement costs

How to Compute CGT

The net capital gain is calculated by subtracting allowable expenses and any exemptions from the total capital gain. For example, if the total capital gain on a property transfer is KES 10 million and allowable expenses are KES 2 million, the net capital gain is KES 8 million (KES 10 million – KES 2 million). The CGT due would then be 15% of KES 8 million, resulting in a CGT liability of KES 1.2 million (KES 8 million x 15%).

Payment of CGT

To pay CGT in Kenya, the individual or entity responsible for the transfer must file a return with the Kenya Revenue Authority within three months of the transfer. The tax must be paid within 30 days of filing the return.

Exemptions to CGT

Certain transfers are exempt from CGT, including:

Transfers for securing a loan
Transfers between spouses
Transfers of shares listed on the Nairobi Securities Exchange
Transfers by a creditor for returning property used as security for a debt or loan

Potential Impacts of Increased CGT

The tripling of the CGT rate to 15% may have several impacts, including:

Decreased demand for property, slowing down the real estate market.
Decreased supply of property as owners may hold onto their property to avoid higher taxes.
Decreased investment in property due to higher tax discouragement.
Negative impacts on economic growth, particularly in the construction and real estate industries, and related sectors like lending and insurance.
Reduced commissions for property agents as sellers might lower commissions in response to the higher tax burden.

Contact Us

WKA Advocates has a dedicated Corporate Commercial department to assist with understanding the Tax Regime in Kenya. For legal assistance, contact us at:

Email: info@wka.co.ke
Website: www.wka.co.ke
Phone: +254 798 03 580
Address: Nairobi Hub, Parklands, Valley View Business Park, 6th Floor, City Park Drive, Off Limuru Road.

Conclusion

We hope this information helps in understanding the impact of the increased Capital Gains Tax on property sales in Kenya. Please note that this newsletter provides a general guide and should not be relied upon without legal advice. For further information or legal assistance on compliance or any other legal issue, feel free to contact us.

Authors:

William Karoki, Founding Partner