Capital Gains Tax – Effective 1st January 2023, the Finance Act, 2022 amended the Income Tax Act increasing the Capital Gains Tax rate to 15% from 5%. Capital Gains Tax (CGT) is imposed on the profits acquired from the sale or transfer of property situated in Kenya, whether or not the profit was acquired before 1st January 2015. The tax is declared and paid by the transferor of the property. CGT is a final tax meaning; the tax is not subject to further taxation after payment of the 15% rate of tax.
How do you compute capital Gains Tax?
Let’s say, you’ve sold your parcel of land or would like to transfer some shares. Net Gain is calculated by subtracting the cost of the asset (including any expenses related to the purchase or sale of the asset such as construction, value enhancement expenditures, preservation of the property; cost of defending title or right over the property, costs incurred in the valuation of the property, legal fees, etc.) from the sale price of the asset. The resulting capital gain is then subject to taxes at the rate of 15%.
What constitutes a Transfer?
If a 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 compensation is received in respect of the loss, destruction, or extinction unless that compensation is utilised 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 seizure of assets of substantially all property rights, including the surrender of shares or debentures upon a company’s dissolution.
How to Determine the Transfer Value/Selling Price for the purpose of Capital Gains Tax
A transferor can determine the transfer value or selling price of the property for purposes of computing Capital Gains tax through:
- 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 e.g. rent.
- Compensation received for damage, injury to the property or for the loss of the property.
- Insurance policy reimbursement in respect of injury, loss, or damage to the property.
- An amount by which the liability of a person to another person entitled to property by way of security or to the benefit of a charge or encumbrance is reduced as a result of dealings with the property for the purposes of enforcing or giving effect to the security, charge or encumbrance, together with an amount received by the person out of the proceeds of those dealings.
What are some exemptions of 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 or between former spouses as part of a divorce settlement or a bona fide separation agreement
Transfer of assets to immediate family or to a company where spouses or a spouse and immediate family hold 100% shareholding.
A gain on the transfer of securities traded on any securities exchange licensed by the Capital Markets Authority.
A private residence if the individual owner has occupied the residence continuously for the three-year period immediately prior to the transfer of the concerned subject to the provisos under Paragraph 36(c) of the First Schedule to the Income Tax Act, Cap 470.
How does a Taxpayer pay for Capital Gains Tax?
CGT is due on or before the date of the transfer of the property but not later than the 20th day of the transfer. A Taxpayer can initiate payment online on iTax after which they will receive a payment slip. They should then present the payment slip at any KRA-appointed bank with the due tax to complete payment. They can either pay in cash, by cheque, or via RTGS. It’s important to note that the payment slip expires within 30 days.
KENNEDY M | Managing Partner | GNA Real Estate