Definitive Guide to Capital Gains Tax for Real Estate in Kenya
One of the most thriving businesses in Kenya is the buying and selling of property. Once a buyer and seller agree on the property price, then the seller or transferor of the property needs to bear in mind that they have an obligation to pay Capital gains tax. President Uhuru Kenyatta assented to the Finance Act, 2014 effectively reintroducing capital gains tax through an amendment to the Eighth Schedule of the Income Tax Act (ITA) to to reduce budget deficits and raise funds for infrastructure and development projects. The move was aligning tax laws within the East African Community, since Kenya was the only state that did not levy taxes on capital gains. Kenya’s levy is at the bottom with Tanzania and Uganda charging being between 10% to 30%.
What is Capital Gains Tax?
Capital Gains Tax (CGT) is tax that is levied on transfer of property situated in Kenya acquired on or before January 2015. The rate of tax is 15% of the gain and is paid by the seller or the transferor of the property. It is a final tax and therefore not subjected to further taxation after payment.
Capital Gains Tax is separated into three types.
CGT 1 for land and buildings
CGT 2 for shares and
CGT 3 for exemptions.
Property may be transferred from one party to another through different ways such as gifting, inheritance, selling e.tc. It is important to note that not all cases of transfer of property attract payment of Capital Gains Tax.
When computing Capital Gains Tax, three terms are used.
Net transfer value – The transfer value less incidental expenses to the transfer.
Adjusted cost of the property – The cost of acquisition, expenditure for enhancement of preservation of the property; cost of defending title over property and incidental costs of acquiring property.
Capital Gain or Loss- 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.
Exemptions on Capital Gains Tax.
The following transactions are exempt from Capital Gains Tax because they are deemed to be non-profit transactions.
Ã‚Â· Charging property as security for a loan
Ã‚Â· Property (including investment shares) transmitted under inheritance.
Ã‚Â· Transfer of a deceaseds property to the personal representative;
Ã‚Â· Vesting of a Company’s property in the liquidator by an order of the court during winding up.
Ã‚Â· Vesting of property in the Official Receiver or Trustee in Bankruptcy.
Ã‚Â· Transfer of property to a beneficiary by a trustee subject to a trust.
Ã‚Â· Sale of a deceasedÃ¢â‚¬â„¢s property to administer the estate of the deceased provided the sale is completed within two (2) years of the death of the deceased.
How do I pay for Capital Gains Tax?
Capital Gains Tax is due on or before transfer of property but not later than the 20th day after the transfer. Payment is initiated online by logging into iTax where you generate a payment slip. You can then make payment by cheque or RTGS at any KRA appointed bank. The payment slip expires within 30 days, so you need to make payment within this period.
As a real estate agent in Kenya or a purchaser, please consult a tax or legal expert to guide you so that you do not incur any penalties for unpaid tax. As a buyer, please take into consideration the tax implications as you determine the budget available for property purchase.
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