What you should know about capital gains tax in Kenya

Capital gains tax
Capital gains tax is charged at 5 per cent of the net gains made from property sale by the seller. PHOTO/FILE
Capital gains tax is a levy payable on the profit realised from sale of an asset that is sold at an amount higher than the initial cost of purchase.

The levy, which was abolished in Kenya in 1985, was reintroduced in August 2014 through an Act of Parliament as a means to raise government revenue.

Capital gains tax was to be levied on profits generated from the sale of property and company shares. However, the levy caused a significant decline in the level of trade at the Nairobi Securities Exchange (NSE) a situation that saw the government stopping the taxing of share sale profits.

The tax is, however, still applicable on property and is charged at 5 per cent of the net gains made from property sale by the seller and it is the duty of the seller, not the buyer, to pay the total amount.

To calculate capital gains, start with the proceeds of disposition. This may be the cash you received after selling a property or any other type of proceed that you earned in exchange for disposing of an asset.

In the event where a property owner gives his asset away, he or she must use the asset’s fair market value as the proceeds of disposition.

To explain, imagine you sold an asset for Sh1 million. You originally bought the asset for Sh500,000, invested Sh200,000 in capital improvements, and spent Sh20,000 selling the asset.

In the above case, your total costs are Sh720,000 and your net gain is Sh280,000. Your tax payable to the Kenya Revenue Authority (KRA) will be 5 per cent of Sh280,000.

Conversely, if you sold the same asset for Sh500,000, you would have to report a capital loss of Sh220,000.

In the event that purchase records are unavailable the property is valued at the market value during the period it was acquired or according to the stamp duty paid.

There are several transactions that are exempted from capital gains tax including the transfer of property between spouses including as a divorce settlement, the sale of property for purposes of administering the estate of a deceased person, transfer of assets between spouses, former spouses or their children.

The exemption also includes sale of land by an individual, where the proceeds are less than Sh3 million, transfer of residential property where the seller has lived for at least three years prior to the disposal and sale of less than 50 acres of agricultural land outside gazetted townships among others.

Collection rates for capital gains tax are extremely low due to lack of awareness among Kenyans and complacency on the part of the State, with enforcement against non-compliance being almost non-existent.

To improve on this, the KRA has partnered with The Institution of Surveyors of Kenya to create awareness about the tax among Kenyans.

This move is informed by the fact that surveyors are some of the first professionals in the field to interact with buyers and sellers in the real estate sector.

The reintroduction of capital gains tax is expected to boost the government’s tax revenue collection which will aid in reducing the annual budget deficit.

Additionally it is a way of harmonising the tax and fiscal policies in the east African region by synchronizing Kenya with its neighbours that enforce capital gains tax.