Introduction
Capital Gains Tax (CGT) was introduced in Kenya in 1975 but was later suspended in June 1985. The tax was subsequently reintroduced by the Finance Act of 2014 which amended the Eight Schedule of the Income Tax Act cap 470 Laws of Kenya (Income Tax Act), with effect from 1st January 2015 at the rate of 5% of the net gain/profit.
Most recently, an amendment to the Income Tax Act via the Finance Act of 2022 increased the rate of CGT to 15%, effective 1st January 2023. The net effect of this amendment is that property owners (including owners of shares) will now pay CGT three times the previous rate while transferring assets.
Income subject to CGT
CGT is the income tax levied on net gains/profits which accrue to a person on the transfer of immovable property (land and buildings) and shares of private companies, considered ‘capital’ items. Gains made by a person on transfer of moveable assets such as motor vehicles, furniture, household items and computers are not subject to CGT in law as their transfer is likely to involve a loss; such items are usually transferred at lower value than their acquisition costs because they depreciate in value after their acquisition.
A transfer of property for the purpose of CGT occurs in the following circumstances:
- If the 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 a sum by way of compensation is received in respect of the loss, destruction or extinction unless that sum is utilized 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 forfeiture of, or the expiration of substantially all rights to property, including the surrender of shares or debentures on the dissolution of a company.
Gains on transfer by an individual of a private residence which such individual has occupied for a continuous period of three years immediately prior to the transfer concerned.
Gains a person makes on transfer or sale of shares in marketeable securities and shares listed in the Nairobi Securities Exchange (NSE) are subject to withholding tax, normally deducted and accounted for by licensed stock brokers as agents.
Exemptions from CGT
CGT is not due in the following instances, where the Income Tax Act does not recognise a ‘transfer’ as having occurred:
- 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 (children of the spouses or former spouses)
- Transfer to a company where spouses or a spouse and immediate family hold 100% shareholding
How to Calculate Gain Subject to CGT
The gain that is subject to CGT is calculated by taking the transfer value/selling price and deducting the acquisition and allowable incidental costs. Therefore, net gain is calculated as below.
The transfer value/selling price for the purposes of CGT is computed by reference to the following amounts (if any) as appropriate having regard to the manner of transfer:
- 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, or loss or damage to the property.
The allowable incidental costs include fees paid for professional services e.g., surveyor, valuer, accountant, agent or legal services, costs of transfer, loan/mortgage costs and costs of advertising to find seller.
In the case of a property acquired by way of a gift (or essentially at no cost, as is often the case with inherited property), the transfer value/acquisition cost is the price the property would fetch were it sold in the open market at the time of its gifting (acquisition at ‘no cost’), as determined by the Commissioner General of the Kenya Revenue Authority or its appointed officers.
Liability for CGT
CGT is due from the person making the gain, that is the seller or transferor, and is payable not later than the 20th day of the month following the month in which such gain is made.
ChebetLaw- January 2023