Capital Gains Tax (CGT) is a tax levied on the profits an individual or company gets from a transfer of assets situated in Kenya. A transfer can constitute a sale, exchange, disposal, or gifting of the property to another entity or individual. Targeted assets and properties include land, buildings, and unlisted shares (private equity).
The tax regime was first introduced in Kenya in 1975 in a bid to broaden the tax base. A decade later, CGT was suspended due to failure in implementation and negative impact on investments. It stayed suspended for three more decades, until 2015 when it was reintroduced through the Finance Bill of 2015.
From Jan 1, 2015, investors were mandated to pay a 5% tax on all gains from the transfer of property and private equity. Fast forward to Jan 1, 2023, the eligible assets were added to include any property situated within Kenya, regardless of whether the property was acquired on or before Jan 2015. In addition, the CGT rate rose threefold from 5% to 15%.
Overview of Capital Gains Tax in Kenya
CGT is one of the ambiguous tax regimes in Kenya, with most people wondering what assets are taxable and which are exempted. The scope was narrower in 2015 when the tax was first reintroduced, but as of 2023, more assets were recognized by KRA as taxable, including tangible and intangible assets. The scope now includes:
- Land
- Real estate buildings
- Shares
- Bonds
- Machinery
- Intellectual property like authored books, patents, trademarked designs, etc.
Keeping up with this scope is not easy for most taxpayers and investors.
What is the Rate of Capital Gains Tax in Kenya?
The rate of CGT in Kenya is 15% of net gain. But what is the net gain? To understand net gain in the calculation of CGT tax, we need to first define various terms used here. These are:
Transfer Value
The transfer value is the gross compensation received after transferring the asset or property. For instance, if you quoted 10 million for a piece of land and that’s what the buyer paid, that’s the transfer value of that asset.
Incidental Costs on Transfer
These are costs incurred during the transfer of the property. It includes legal fees, agent fees, advertisement costs, and other miscellaneous expenses. For the purpose of this post, let’s assume the incidental costs on transfer are 1 million.
Adjusted Cost
The cost incurred in acquiring the property, improving it (incidental costs on acquisition), and other enhancements. For example, the land you’re selling at 10 million may have cost you 1 million in purchase price, and 2 million in fencing, drilling boreholes, and planting trees. The adjusted cost in this case is 3 million (1+2).
Now,
The Net Gain = (Transfer Value – Incidental Costs on Transfer) – Adjusted Cost
From the above examples,
Net Gain = (10 -1) – 3 = 6.
The Net Gain is 6 million, and this is the taxable amount. In that case, if the CGT rate is 15% of the net gain, the payable tax will be
15% of 6 million
That is, 900,000.
What happens when you sell the property at a loss? The reason KRA calls it Capital Gains Tax is because it’s only applicable where the transfer was profitable. In the event, you make a loss during the transfer, you are not expected to pay CGT.
Allowable Costs Recognized Under Incidental and Adjusted Costs
You need to be aware of allowable incidental and adjusted costs in the calculation of CGT. This awareness will help you maximize your gains and save more money. You don’t want to lose your profits to the taxpayer. You must deduct these costs from your transfer value. They include:
- Acquisition cost or Construction costs in the case of real estate buildings
- Loan and mortgage interests
- Advertisement costs to find a buyer
- Property valuation costs
- Legal fees
- Agent fees
- Enhancement costs- costs you incurred to add value to the property
Exemptions: Transfer Gains That Are Exempted From Paying CGT
KRA exempts the following from paying capital gains tax:
- Property dealers’ income- the income is already taxed under a different tax regime
- Company shares and debentures
- Transfer of property to pay a loan or debt
- Transfer of property by a creditor after loan repayment- in a situation where the property was used as collateral
- Transfer of property to a beneficiary in administration of the estate of a deceased person
- Transfer of assets to an immediate family member, spouse, or ex-spouse in a divorce or separation
- Transfer of private residence where the individual owner has occupied the residence continuously for three years after the prior transfer
- Internal restructuring where the transfer doesn’t involve a third party
- Transfer of securities traded on the Nairobi Stock Exchange
- Transfer of land whose value is not more than 3 million
- Transfer of agricultural land less than 50 acres and situated outside a municipality, gazetted township, or urban area
- Transfer of title of immovable property to a family trust and property sold to transfer the title to a registered family trust
How to File Capital Gains Tax
CGT is a one-time tax (final tax). Once you paid the tax, there is no further taxation for that gain. The tax is due 30 days after completion of the transfer. The seller is required to declare and pay the tax within the stipulated period, failure to which a penalty is applied. Follow the steps below to file capital gains tax:
- Go to https://itax.kra.go.ke/ and log into your account using the KRA PIN and password.
- Navigate to Payments.
- Select Payment Registration.
- On the Tax head menu, select Income Tax followed by Capital Gains Tax as the subhead.
- Fill in the transaction details as needed including the Transfer Value, Acquisition Cost, and Adjusted Cost.
- Click Submit.
- You’ll receive a payment slip.
- Carry the payment slip to a KRA-partner bank and present it at the bank.
- Make the payment.
That’s all. You have successfully paid your capital gains tax.
Conclusion
This comprehensive guide explained how to file capital gains tax in Kenya. This is an income tax levied on gains from the transfer of assets like land, property, and unlisted securities. We hope you now have an idea of what this tax entails. For further clarification and assistance with your taxes get in touch with us. Gichuri & Partners is your reliable tax consultant for personalized strategies and expert guidance.
