The Impact of tripling of Capital Gains Tax effective January 2023
Capital Gains Tax was reintroduced in Kenya through the Finance Act 2014 as an amendment to the 8th Schedule of the Income Tax Act Cap 470. Capital gains tax is applicable on sale of immovable property or on transfer of shares for companies that are not listed in the Stocks Exchange.
The Act provides for a 15% tax on net gains upon transfer of property (shares, land, buildings) situated in Kenya.
The current CGT rate is 5% of the net gains upon the transfer of immovable property. However, the Finance ACT 2022 increased the applicable capital gains tax to 15% from 5% effective 1st January 2023. The 15% tax is a final tax and the net gain is not subject to further taxation.
Assuming a company intends to dispose off its parcel of land located in Nairobi County accruing a net gain of Kshs 3,000,000. What is the CGT payable?
With the increase in CGT from 5% to 15%, the company will incur additional taxes by Kshs 300,000 if it disposes the property in January 2023.
On the other hand, the Income Tax Act also exempts the following transactions from Capital Gains Tax;
- Shares in the stock or funds of the government, the High Commission or the Authority established under the Organization or the Community.
- Shares of a local authority.
- A private residence if the individual owner has occupied the residence continuously for the 3 year period immediately prior to the transfer concerned;
- Property (being land) transferred by an individual where the transfer value is not more than Kshs. 3 Million.
- Transfer of agricultural property having an area of less than 50 acres where the property is situated outside a municipality, Gazette Township or an area that is declared by the Minister, by notice in the Gazette, to be an urban area for the purposes of this Act.
- Land which has been adjudicated under the Land Consolidation Act or the Land Adjudication Act when the title to that land has been registered under the Registered Land Act and transferred for the first time.
- Transfer of property under internal restructuring within a group which does not involve transfer of property to a third party (intra group transfers).
- Property (including investment shares) which is transferred or sold for the purpose of administering the estate of a deceased person where the transfer or sale is completed within two years of death of the deceased or within such extended time as the Commissioner may allow in writing.
The tripling of CGT from 5% to 15% will see developers, property owners and investors pay higher taxes upon the transfer of properties compounded with the inflation adjustment of property prices.
We therefore implore property owners intending to dispose off their property to do so before 31st December 2022 to avoid paying triple tax on the disposal.