CAPITAL GAINS TAX

Ken Njuguna, Anjarwalla & Khanna Advocates 14th Oct. 2016

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Background to the Capital Gains Tax

Capital Gains Tax was re-introduced effective from 1st

January 2015 By the Finance Act, 2014.

It was suspended in 1985 with intention of nurturing

growth in the real estate and capital markets sectors.

Income was taxed. Capital was spared from taxation.

This led to claims that the tax system was not equitable.

Expanded Budget Occasioned by Devolution forced the

Treasury to go overdrive to expand revenue base for

Government financing; CGT was a low hanging cherry.

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Overview of Capital Gains Tax

Para 2 of the Eighth Schedule: any gain realised by a person

(whether a company or an individual) on the transfer of property

situated in Kenya, constitutes taxable income under section 3(2)(f) of

the ITA.

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Legislative Framework

S.3 (2)(f): tax is chargeable on capital gains.

S.15 (3)(f) : taxpayers can offset current year capital losses against current year capital gains.

Sec. 34(1)(h) : Gains arising from the transfer of property shall be taxed at a rate of 5%.

Eighth Schedule: any gain realised on the transfer of property constitutes taxable income.

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Transactions Subject to CGT

COMPANY INDIVIDUAL

interests in or

rights to land

marketable securities (Unlisted Shares)

property (as defined under the IGPA)

marketable securities (Unlisted Shares)

road vehicles

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Property Subject to CGT cont’d

Offshore Hold Co.

Kenyan Company

Kenyan Property

Currently no CGT on

sale of shares in

offshore vehicle

CGT on sale of shares

CGT on sale of

property

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Capital Gains Computation

Chargeable gain x 5 % = CGT Payable

Transfer Value

Adjusted Cost

Chargeable Gain

Illustration

YEAR ACTION VALUE (KES)

1980 Bought 2 acre plot of land in

Eldoret Town

20,000

1985 Cost of building office block 650,000

1989 Cost of putting up perimeter wall 250,000

Adjusted cost 920,000

2016 Property sold in 2016 300,000,000

Amount subject to Capital Gains Tax (CGT):

KES 300,000,000 – KES 920,000 = KES 299,080,000

(Transfer Value – Adjusted cost = Chargeable gain)

CGT = 299,080,000 X 5% = KES 14,945,000

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1. When does a transfer arise?

2. What is the value of the transfer?

3. How is the adjusted cost arrived at?

4. Are there any exemptions available?

5. Due date for paying CGT ?

Key issues to Consider in CGT

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When Does a Transfer Arise?

• on sale, exchange, conveyance of property including by way of gift

• whether for consideration or not Disposal

• on the loss, destruction or extinction of property

• unless compensation is received and is used to re-instate the property within one year

Destruction

• on the abandonment, surrender, cancellation, forfeiture or expiration of substantially all rights to property

Forfeiture

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When Does a Transfer Arise?

Cont’d

There is no transfer of property on:

transfer to secure a debt/loan i.e. mortgage

issuance by a company of its shares i.e. subscription for shares

vesting in personal representative and from personal representative to beneficiary pursuant to succession process

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When Does a Transfer Arise?

Cont’d

There is no transfer of property on:

vesting in a liquidator/ official receiver

transfer between spouses / immediate family pursuant to divorce settlement

transfers between a trustee and a beneficiary

Transfer of assets to immediate family or to a family owned company

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Transfer Value - Arm’s Length

Transfers

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Transfer Value - Non-Arm’s Length

Transfers

Non-arm’s length

transfers

Bargain not at arm’s length

Gifts

Related party transaction

Consideration cannot be

valued

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Market Value

Non-arm’s length

transaction

Transfer value market value of property at the time of transfer.

Adjusted cost

lower of:

market value of property at the

time of acquisition

consideration amount used in

computing stamp duty

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Adjusted Cost

Historical Costs

Incidental Costs

Cost of Improvement

Cost of defending right over property

Adjusted Cost

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Incidental Costs

INCIDENTAL COSTS

professional fees including

legal, valuation & advertising

transfer costs

(including stamp duty)

just and reasonable

costs as determined by Commissioner

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Exemptions EX

EM

PTIO

NS

where income is chargeable to other taxes

transfer of machinery subject to wear & tear deductions

private residence occupied by owner for 3 years

transfer value below K.Shs. 3,000,000/=

agricultural property of less than 50 acres outside a municipality

sale under administration of deceased’s estate within 2 years of finalisation of succession proceedings

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Land and buildings – On or before transfer is

lodged at Lands Registry (Finance Act 2015)

Unlisted shares – No clarity but view is that CGT

should be paid before registration

Real estate transactions - How will Seller fund the

CGT payment ?

Due Date

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Some Future Changes…

1. Indexation

The Adjusted Cost is increased by the multiplying

with a factor based on the Consumer Price Index or

the Retail Price Index.

Example of an indexation table set out below.

INDEXATION

1980 245.30

1990 175.25

2000 72.30

2010 10.50

2014 2.56

2016 1.00

Illustration

YEAR ACTION VALUE (KES)

1980 Bought 2 acre plot of land in

Eldoret Town

20,000

1985 Cost of building office block 650,000

1989 Cost of putting up perimeter wall 250,000

Adjusted cost 920,000

2016 Property sold in 2016 300,000,000

Amount subject to Capital Gains Tax (CGT):

KES 920,000 x 245.30 = KES 225,676,000

KES 300,000,000 – KES 225,676,000 = KES 74,324,000

CGT = KES 3,716,200

CGT WITHOUT INDEXATION = KES 14,945,000

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Some Future Changes…

2. Taper Relief

Tapering relief works by discounting the amount of chargeable gains that

are subject to CGT.

The longer the property is held the higher the discount applied to the

chargeable gains.

An example of tapering relief table is set out below (based on the UK

model)

Number of whole years in

qualifying period Percentage of gain chargeable

1 100%

3 80%

5 60%

7 40%

9 30%

10 and above 25%

Illustration

YEAR ACTION VALUE (KES)

1980 Bought 2 acre plot of land in

Eldoret Town

20,000

1985 Cost of building office block 650,000

1989 Cost of putting up perimeter wall 250,000

Adjusted cost 920,000

2015 Property sold in 2015 300,000,000

Amount subject to Capital Gains Tax (CGT):

KES 300,000,000 – KES 920,000 = KES 299,080,000

TAPER RELIEF = KES 299,080,000 x 25%

CGT = 74,770,000 X 5% = KES 3,738,500

CGT WITHOUT TAPER RELIEF= KES 14,945,000

Questions

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Legal Notice: these materials are for training purposes only and do not constitute legal or other professional advice.

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