Capital Gains Tax

What is Capital Gains Tax?

Capital Gains Tax is a tax chargeable on the net gain which accrues to a company or an individual on or after 1st January, 2015 on the transfer of property situated in Kenya, whether or not the property was acquired before 1st January, 2015.

Capital Gains Tax is not a new tax. It was suspended in 1985 and was re-introduced in 1st January, 2015.

What is Property?

Property is defined in the law (Eighth Schedule to the Income Tax Act). It includes land, buildings and marketable securities.

What constitutes a Transfer in Conveyancing?

A transfer takes place: –

1. When a property is sold, exchanged, conveyed or disposed of in any manner (including by way of gift).
2. On the occasion of loss, destruction or extinction of property whether or not compensation is received.
3. On the abandonment, surrender, cancellation or forfeiture of, or the expiration of rights to property.

How do you determine the Net Gain?

The Net Gain is the excess of the transfer value over the adjusted cost of the property that has been transferred. It is this excess that is subjected to tax at 5%.

The Transfer Value of the property is the amount or value of consideration or compensation for transfer of the property less incidental costs on such transfer.

The Adjusted Cost of the property is the sum of the cost of acquisition or construction of the property; expenditure for enhancement of value and/or preservation of the property; cost of defending title or right over property, if any; and the incidental costs of acquiring the property.

It is important to note that the Adjusted Cost is reduced by any amounts that have been previously allowed as deductions under Section 15(2) of the Income Tax Act.

What is the due date/tax point for Capital Gains Tax?

Capital Gains Tax is a transaction-based tax and should therefore be paid upon transfer of property but not later than the 20th day of the month following that in which the transfer was made.

What is the Rate of Capital Gains Tax?

The rate of tax is 5% of the net gain. 

The Finance Act 2022 published on the Kenya Gazette on Thursday; 23^rd June 2022 has increased Capital Gains Tax rate from the current 5% to 15% effective 1^st January 2023.

Who is liable to Capital Gains Tax?

Capital Gains Tax is to be paid by the person (resident or non-resident) transferring the property, that is, the transferor. The transferor can either be an individual or a corporate body.

Is Capital Gains Tax a Final Tax?

Capital Gains Tax is a final tax i.e. the Capital Gain is not subject to further taxation after payment of the 5% rate of tax. Therefore, Capital Gains Tax cannot be offset against other income taxes.

The Finance Act 2022 published on the Kenya Gazette on Thursday; 23^rd June 2022 has increased Capital Gains Tax rate from the current 5% to 15% effective 1^st January 2023.

How to Compute Capital Gains Tax

Capital Gains Tax is on gains arising from sale of property.

Net Gain is Sales Proceeds minus the Acquisition and Incidental cost

Net Gain = (Transfer value – Incidental Costs on Transfer) – Adjusted Cost ( Acquisition Cost + Incidental Costs on Acquisition + Any enhancement Cost)

What are the Allowable Expenses for the purposes of Capital Gains Tax?

1. Loan/Mortgage interest
2. Cost of advertising to find a buyer
3. Costs incurred in valuation of the property
4. Legal fees

How does one determine the transfer value/selling prices for the purpose of Capital Gains Tax?

1. Amount received for transferring the property
2. Sums received in return for the abandonment, forfeiture or surrender of the property.
3. Amount received  for the use of exploitation of the property eg rent
4. Compensation received  for damage , injury to the property or for the loss of the property
5. Insurance policy reimbursement in respect of injury, or loss or damage to the property.

How is Capital Gains Tax declared?

1. The taxpayer does a self-assessment to determine the gain upon which tax is computed.
2. The computations are subject to Commissioner of Domestic Tax confirmation of correct gain as the basis of tax computation.
3. Upon transfer of property, the transferor completes the relevant form (CGT 1) as appropriate and compute and pay the tax thereon.

What documents/information are required in the payment of Capital Gains Tax?

1. Completed CGT form by the seller.

2. Copy of Sale/Transfer Agreement of the property.

3. Proof of the incidental costs related to the acquisition and transfer of the property.

4. A copy of the title deed or ownership document for the property.

5. Report from a registered valuer for property transactions between related parties.

6. Any other document/information that the Commissioner of Domestic Taxes may require.

How do I pay for Capital Gains Tax?

1. Capital Gains Tax is due on or before transfer of property but not later than the 20th day after the transfer.
2. Payment should be initiated online via iTax.
3. The modes of payment include cash, cheque or RTGS.
4. After initiating payment, you will receive a payment slip.
5. Present the payment slip at any KRA appointed bank with the due tax to complete payment.

Note: The payment slip expires within 30 days.

Are there any exemptions from Capital Gains Tax?

Certain transactions are exempted from Capital Gains Tax; these includes: –

1. Income that is taxed elsewhere as in the case of property dealers.
2. Issuance by a company of its own shares and debentures.
3. Transfer of machinery including motor vehicles.
4. Disposal of property for purpose of administering the estate of a deceased person.
5. Vesting of property in the hands of a liquidator or receiver.
6. Transfer of individual residence occupied by the transferor for at least three years before the transfer.
7. Compensation by Government for property acquired for infrastructure development.
8. Transfer of asset between spouses as part of divorce settlement.
9. Sale of land by an individual where the proceeds is less than Kshs. 30,000.
10. Sale of agricultural land by individuals outside gazetted townships where the property is less than 100 acres.
11. Exchange of property necessitated by:incorporation, recapitalization, acquisition, amalgamation, separation, dissolution or similar restructuring involving one or more companies which is certified by the Cabinet Secretary to have been done in the public interest.
12. Transfer of investment shares by a body exempted under Paragraph 10 of the First Schedule.
13. Transfer of investment shares by retirement benefits scheme registered with Commissioner.

What is the treatment of Capital Gains Tax in the Extractive Industry?

The Net Gain on disposal of interest in a person owning immovable property in the mining and petroleum industry is taxable.

The applicable rate of tax is as per the Ninth Schedule of the Income Tax Act, 30% for residents and 37.5% for non-residents with permanent establishments.

The taxable gain is the net gain derived on the disposal of an interest in a person, if the interest derives its value from immovable property in Kenya.

Immovable property means a mining right, an interest in a petroleum agreement, mining information or petroleum information.