I know, the word “taxes,” and especially “capital gains tax,” is not exactly a party starter. Ready to dive into the world of taxes? But trust me, understanding capital gains tax in Kenya is like getting a cheat code for your financial life. It is a key piece of the puzzle that can save you from a lot of headaches (and penalties).
So, let us grab a cup of tea (or coffee, if that is more your speed) and break it all down in a way that is easy to digest. No stuffy jargon, just the facts you need to know, with a bit of fun thrown in.
a. What is a Capital Gain?
Imagine you bought a plot of land in Ngong a few years ago. You paid, let us say, kshs. 1 million. Fast forward to today, and thanks to the area’s development, you have found a buyer willing to pay you kshss. 5 million for that same piece of land.
Woohoo! That is a kshs. 4 million increase? This value increase is the gross capital gain. But when discussing capital gain, the net capital gain is what matters. In simple terms, a capital gain is the increase in value over time.
This gain is realised when you sell or “transfer” a property or asset that has increased in value. It is not about the total amount you receive, but the net profit itself. It is the difference between what you sold it for and what you initially bought it for, after accounting for certain costs along the ownership journey.
Example:
A few years ago, Janet invested in a small apartment in Kilimani for kshs. 10 million. She recently sold it for kshs. 18 million. Her capital gain, before considering any other costs, is kshs. 8 million. This amount will be subject to Capital Gains Tax (CGT) unless she can provide evidence for the other expenses.
b. Transactions Subject to Capital Gains Tax
So, what kinds of “property or assets” are we talking about here? It is not just land and buildings. The Capital Gains Tax applies to a whole range of properties and assets that you might transfer in this country. The most important thing is that the property must be located in Kenya.
The most common transactions that attract Capital Gains Tax are:
a. Land and Buildings – This is the big one. Selling a plot, a house, or a commercial building.
c. Shares and Securities – Selling shares of a company, but there is a cool exemption for shares traded on the Nairobi Securities Exchange (NSE). More on that in a bit.
c. Intangible Assets – This is a bit more advanced but includes things like goodwill, patents, and trademarks.
For the complete update list of transactions subject to Capital Gains Tax, check KRA’s website – this list is changed frequently.
c. Transactions Exempt from Capital Gains Tax
Not every transfer of property is subject to Capital Gains Tax. The government has provided some exemptions to make life a little easier for certain transactions. These include:
a. A Private residence – If you are selling a house that you have lived in continuously for at least three years before the transfer, you are off the hook. This is a big relief for homeowners.
b. Transfer of property between family members – Transferring property to your spouse or an immediate family member is also exempt.
c. Shares traded on the Nairobi Securities Exchange (NSE) – The government wants to encourage stock market trading, so gains from selling shares on the NSE are currently not subject to this tax. This is a huge incentive for local and international investors.
d. Transfer of property as security for a debt – If you transfer your property to a bank to secure a loan, you do not pay the tax. The tax would be payable only if the bank sells the property to recover the debt.
Example:
Mark inherited a piece of land from his father in Machakos. He later sold it for a profit. Since it was an inheritance, the transfer to him was exempt, but the gain he made from selling it to a third party is subject to Capital Gains Tax.
d. What is Capital Gains Tax?
Alright, so we know what a capital gain is. Now, what is the tax part? Capital Gains Tax is simply the tax you pay on that profit. It is a one-time tax, charged at the time of the transfer of the property. It is important to remember that this is a final tax.
This means once you pay the Capital Gains Tax, the gain is not subject to any other income taxes. You cannot use it to offset other tax liabilities, and it is not added to your regular income for the year. It is a clean, separate transaction.
Example:
Let us go back to Janet and her Kilimani apartment. Her gain was kshs. 8 million. The Capital Gains Tax she will pay is a percentage of that kshs. 8million though she sold the apartment for kshs.18 million. Capital Gains Tax is not levied on the full sale amount.
e. What is the Current Capital Gains Tax Rate?
This is a number you absolutely need to remember. In Kenya, the current Capital Gains Tax rate is 15% of the net gain. This rate was increased from 5% to 15 % on 1st January 2023. So, it is a recent change that has significant implications.
Refer to the recent High Court ruling about the Capital Gains Tax tax point.
The “net gain” is the profit after you have deducted the cost of acquiring the property and any incidental costs associated with the transfer, such as legal fees or stamp duty.
Example:
Let us calculate Janet’s tax. Her gain was kshs. 8 million. Let us assume she had incidental costs (like legal fees and stamp duty) of kshs. 500,000. Her net gain would be kshs. 7.5 million. The Capital Gains Tax she would pay is 15% of kshs. 7.5 million, which is kshs. 1,125,000. That is a tidy sum. Knowing the Capital Gains Tax rate is key to making informed financial decisions.
f. What is a Tax Point?
You might be thinking, “When exactly do I pay this tax?” This is where the concept of a “tax point” comes in. For Capital Gains Tax, the tax point is the exact moment when the tax becomes due and payable. In Kenya, this happens at the point of transfer (sale and payment) of the property.
This is typically when the transfer documents (like the land title deed) change hands in the name of the new owner – contracts signed and money changes hands. Think of it as the finish line of the transaction. You cannot just transfer the property and then pay the tax later.
The seller must pay Capital Gains Tax, and the buyer must pay Stamp Duty. Once these payments have been made, the registration of the transfer will be done. Capital Gains Tax is administered under the national Treasury, while Stamp Duty is administered under the Ministry of Lands.
Example:
A buyer and seller agree on the sale of a piece of land. The sale agreement is signed, and the money is in an escrow account. The transaction is completed, and ownership has changed hands. This is a tax transaction as far as the seller is concerned and should report the sale in that year of income.
The conditions for the tax point have been met. The Capital Gains Tax should be paid. The transfer documents are registered at the land registry in the buyer’s name. It is at this very moment that the stamp duty should be paid.
Capital Gains Tax and stamp duty are distinct items that become due at different times throughout the transaction history of the subject property or item subject to the Capital Gains Tax.
g. How Capital Gains Tax is Established
This is where the rubber meets the road. The process for establishing and paying Capital Gains Tax is relatively straightforward, but it requires careful attention to detail.
a) Establish the Net Gain
The first step is to figure out your profit. This is the difference between the selling price (transfer value) and the acquisition cost (what you paid for it). You then deduct any costs directly related to the transaction, like legal fees, agent commissions, and stamp duty paid at the time of purchase.
This is a cash flow issue for the property or assets that you are selling. There are two critical questions that you should ask:
i. How much money have you paid out (buying and other expenses) for that property or asset?
ii. How much money are you receiving?
b) Fill out the Capital Gains Tax Template on i-Tax
You will need to fill out a specific template on the KRA iTax portal. This is where you will declare the details of the transaction, including the sale price, the original cost, and any allowable deductions.
c) Pay the Tax
Once the template is submitted, the system will calculate the tax based on the 15% rate or the earlier rate, depending on the rate conditions. You then generate a payment slip and make the payment to KRA through a bank, M-Pesa, or other approved payment method. (As mentioned, this payment should be a prerequisite for the transfer of the property, but we live in strange times.)
Example:
David sold a piece of land in Nakuru for kshs. 20 million. He had bought it for kshs. 12 million. At the time of purchase, he paid legal fees of kshs. 100,000 and a stamp duty of Kshs. 480,000. When he sold the land, he paid a land agent’s commission of kshs. 200,000 and legal fees of kshs. 150,000.
He had not fenced the land and did not have receipts of any other expenses.
Transfer value: kshs. 20,000,000
Acquisition cost: kshs. 12,000,000
Incidental costs: (kshs. 100,000 + kshs. 480,000) + (kshs. 200,000 + kshs.150,000) = kshs. 930,000
Net Gain – kshs. 20,000,000 – (kshs. 12,000,000 + kshs. 930,000) = Kshs. 7,070,000
The Capital Gains Tax payable is 15% of kshs. 7,070,000 = kshs. 1,060,500.
h. Penalties for Failure to Comply
Just like with any tax, failing to comply with Capital Gains Tax obligations can lead to significant penalties and other consequences. KRA is strict when it comes to taxes. The penalties are designed to be a strong deterrent.
If you fail to pay the tax on time, you are looking at:
i. Penalties – A penalty of 20% of the unpaid tax amount.
ii. Interest – Interest on the unpaid tax at a rate of 1% per month or part of a month.
Example:
Let us say our friend David from the previous example was supposed to pay his Capital Gains Tax of kshs. 1,060,500 by the due date. He got busy and forgot, only to remember three months later.
Penalty: 20% of kshs. 1,060,500 = kshs. 212,100
Interest: 3 months x 1% of kshs. 1,060,500 = kshs. 31,815
Total Owed: kshs. 1,060,500 (original tax) + kshs. 212,100 (penalty) + kshs. 31,815 (interest) = kshs. 1,304,415.
That is a painful extra cost that could have been easily avoided.
Conclusion
So, there you have it. Capital Gains Tax in Kenya is not a monster hiding in the dark. It is a straightforward tax on the profit you make from selling certain assets. By understanding what a capital gain is, which transactions are taxable, the current capital gains tax rate, and the importance of the tax point, you can navigate these waters with confidence.
Remember to keep good records of your property purchases, including all the incidental costs. This will make calculating your net gain a breeze and help you stay on the right side of the taxman. And most importantly, always pay your taxes on time to avoid those pesky penalties and interest. Now you are officially in the know about Capital Gains Tax in Kenya. Happy transacting.
