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Capital Gains Tax

CGT was introduced in Kenya in 1975 and suspended on 13 June 1985 – when Kenya was seeking to spur growth in the mining sector, real estate market and deepening local participation in capital markets.

The Finance Act 2014 amended the Eighth Schedule of the Income Tax Act ("ITA") and as a consequence, CGT was reintroduced with effect from 1 January 2015.

The reintroduction of the capital gains tax regime in Kenya is expected to widen the tax net and increase tax revenue collection for the government.

In addition, from a regional integration perspective, the reintroduction of CGT is seen as a step towards bridging the differences in fiscal and tax policies between the East African States by aligning Kenya to its neighboring countries that impose tax on capital gains.

Overview

A ‘Capital Gain’ can be ordinarily defined as the difference between the purchase price and the selling price of certain assets.

CGT is tax that is levied on transfer of property situated in Kenya, with effect from 1 January 2015.

Net Gain is Sales Proceeds minus the Acquisition and Incidental cost.

It is a final tax i.e. the Capital Gain is not subject to further taxation. CGT is on gains arising from sale of property.

It is declared and paid by the transferor of the property.

CGT Rates

Uganda

Capital gains are included in and taxed together with the business income at a rate of 30%.

Tanzania

Capital gains tax is at corporate tax rate of 20%

Rwanda

Capital gains at 30%

Kenya

It has the lowest rate at 15% in the region.

Types of CGT

There are three CGT types.

  • CGT 1 is meant for land and buildings
  • CGT 2 is for shares
  • CGT 3 is for the exemptions which are all listed on itax.
Exemptions on Capital Gains Tax

It is important to note that not all cases of transfer of property attract payment of CGT. Exemptions include but not limited to:

  • Income that is taxed elsewhere as in the case of property dealers
  • Disposal of property for purpose of administering the estate of a deceased person
  • Transfer of property between spouses as part of divorce settlement
  • Sale of land by individual where the proceeds is less than 3 million
  • Vesting property to a liquidator or receiver
  • Agricultural land that is less than 50 acres;
  • Exchange of property during reorganization/restructuring by companies approved by Treasury to be in public interest;
  • Transfer of securities by a body expressly exempted under the Income Tax Act.
  • Transfer of securities traded at NSE.
  • Transfer of property for securing a debt/loan
Computation

When computing CGT, three terms are used.

  • One is the net transfer value which is the value of consideration or compensation for property transferred less incidental expenses to the transfer.
  • The second term is the adjusted cost of the property which is the cost of acquisition, expenditure for enhancement of preservation of the property; cost of defending title over property and incidental costs of acquiring property.
  • The third term is Capital Gain or Loss which is Net transfer value less the adjusted cost of the property. When these details are captured in system during the payment process, then the amount payable will be 5% of the gain made.
Worked Example

Assume sale proceed is Kshs.8,000,000 and the incidental costs were

  • Legal fees- Kshs. 200,000;
  • Advertisement – Kshs. 50,000;
  • Agent’s commission – Kshs. 500,000
  • Valuation fees – Kshs. 150,000.
  • Total incidental costs Kshs.900,000
  • Transfer value Kshs.7,100,000
Adjusted Cost Computation

Assume the cost of acquisition/construction was Kshs.3,200,000 and the other relevant/incidental costs were as follows:

  • -Legal cost on acquisition - Kshs. 80,000;
  • -Valuation – Kshs. 90,000;
  • -Legal cost to defend title Kshs. 100,000;
  • Total incidental costs Kshs. 270,000
  • Adjusted cost Kshs.3,200,000+270,000 = 3,470,000
Computation of Gain/Tax
  • Transfer value Kshs.7,100,00
  • Less adjusted cost (Kshs.3,470,000)
  • Gain on transfer Kshs.3,630,000
  • Tax at 15% of Gain (15% x Kshs. 3,630,000) = Kshs. 544,500/00
How to pay 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.
NON COMPLIANCE

Where CGT is not paid 20 days after date of transfer, KRA sends the individual an email notification of the pending CGT.

CGT is assessed by KRA and attached to your PIN on itax.

Consequently reflects as pending income tax at year end.

KRA are yet to establish penalties for failure to file and pay CGT.


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