What You Need to Know About Capital Gains Tax

In line with the amended Kenya Finance Act of 2022, the capital gains tax stands at 15% up from 5% effective January 2023. Capital gains tax is imposed on the profit made from the sale of a capital asset such as a stock, bond or real estate property. The calculation is made from the sale price with few deductions made.

This blog aims at educating real estate investors on a few things regarding capital gains tax. It covers numerous subtopics to exhaustively help our readers understand this tax. Below are the subtopics.

1. What is capital gains tax?
2. Which is the current prevailing capital gains tax rate?
3. How much is capital gains tax?
4. Are there any exemptions to this tax?
5. Impact of capital gains tax on real estate
6. How is capital gains tax payment made?

What is Capital Gains Tax?

 In simple terms capital gains tax is imposed when transferring property in any location in Kenya. The declaration of this tax is done by the transferor of property. A transferor of property is a person or entity that is transferring ownership of a piece of real estate or other property to another person or entity. The transferor may be the current owner of the property or they may be an intermediary such as an estate executor or a trustee.

The tax will take effect from properties acquired on or after 2015. The calculation is made from net gain of the sales profits. This is after deduction of the cost of acquisition and other subsidiary costs.

Computation of the Capital Gains Tax

Computing the capital gains tax is not rocket science, it is easy and straight forward. Below is the formula to use to determine the amount to pay.

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

Definition of terms

1. Net gain – refers to the amount by which the proceeds from the sale of an asset exceed the original cost of the asset. It is the difference between the sale price and the original cost, after taking into account any associated costs or expenses.
2. Transfer value – In the context of real estate, transfer value would be the amount that the property is sold for, which includes the purchase price, closing costs and any other expenses associated with the purchase of the property.
3. Incidental costs on transfer – Incidental costs on transfer refer to additional expenses that may arise during the process of transferring assets or property from one person or entity to another. These costs can include legal fees, appraisal fees, and title search fees, among others. These costs should be taken into consideration when determining the overall cost of a transfer and should be included in any agreements or contracts related to the transfer.
4. Adjusted cost – The adjusted cost is the original cost of an asset adjusted for any changes such as depreciation, amortization, or impairments. In accounting, the adjusted cost is used to determine the current value of an asset. The adjusted cost is used to calculate the gain or loss on the sale of an asset and also used to determine the cost basis of an asset for tax purposes.

It is important to note that there are some expenses that the tax authority grants before computation of the capital gains tax is done. The expenses include loan interest, marketing costs, valuation costs, the asset enhancing costs  and the legal fees during the transaction. There also other additional exemptions to this tax:

Exemptions in the capital gains tax

1. When the income is subject to taxation in a different area such as corporation tax
2. A company issuing its own shares and debentures
3. Transferring a property for use as a collateral for a debt or loan
4. When creditors are transferring the property back to the owner after clearance of a debt
5. Transferring properties between spouses and between family members
6. When you transfer a property to a company where a spouse of family member owns 100% shares
7. Transfer involving a private residence if the individual owner has occupied the residence continuously for the three-year period immediately prior to the transfer concerned

What is meant by a property transfer?

There are several questions regarding what exactly property transfer is. We have a compilation of different things that constitute transfer of a property.

1. A transfer of property is said to have been done if selling, exchanging, conveying, disposing or gifting is done by either party.
2. When compensation is done for property that may have gone through loss, destruction of extinction
3. In circumstances when surrendering of the property rights happens or even shares in the case of a company.
4. The amount received from rental properties is also subject to this particular tax.

How Capital Gains Tax is paid

The Kenya Revenue authority has a guideline on how the paid of this tax should be done. For a better understanding of each step, below is a step by step guide on how to pay. In addition, it is prudent to note that the payment should be made not later that the 20^th day after the transfer is done.

1. Log in to your iTax portal and commence the payment of the capital gains tax
2. Indicate your most preferred mode of payment. The available modes of payments are either using cash, cheque or RTGS
3.  Once you initiate the payment, you will receive a payment slip online
4. You are required to present the payment slip to any KRA appointed bank with the due tax to complete payment.

Last but least, it is important to take note that once the payment slip is sent to you via iTax, it expires within 30 days.

The possible impact of Capital Gains Tax on Real Estate

Generally, increase in taxes have an impact of reducing the incomes and this will be no exemptions on implementation of the capital gains tax. Sellers will experience decrease in their incomes after the sale of the land, buildings and company shares outside Nairobi Security Exchange.

The second probable impact is the possibility of a slight increase in the prices of the assets to accommodate the tax factor as well as inflation adjustments. This is common across various products and services, when taxes increase, the cost of the product or service also increases to cover the seller’s profit margins. On the hand, some investors may reduce the prices of properties as a way to avoid taxes on the gains. This is because the taxable net gain for the sale of land is at Ksh 3M and above.

On the positive side, real estate is a relatively safe investment as property values tend to be less volatile than other investments such as stocks and it can be less affected by the ups and downs of the market. As such, there is less likelihood of a slowdown in the real estate sector as a result of the increase in taxes because there is a growing demand for properties, especially residential in Kenya. This is as a result of the growing population in urban areas and the increasing demand to have a place to call home and settle their families.

Further, the real estate in Kenya market is still attractive and the capital gains tax is lowest in other East Africa Countries such as Rwanda where the rate is 30%. As such, the Kenyan real estate market still remains attractive by locals and foreigners willing to invest in real estate.

In conclusion, the government imposes this tax because capital gains represent income that has been earned, and income is typically subject to taxation. Additionally, capital gains taxes can help to promote fairness in the tax system by ensuring that those who have more income or wealth pay a larger share of taxes.

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