Capital Gains Tax Skyrockets to 15% From January 1′ 2023- Investors Brace for Impact!

Capital gains tax hike sparks outrage among property investors and realtors! Secretly, I have heard the plausible argument, steeped in political sentiment, that the threefold hike is targeted at weakening the political clout of a particular community.

What is Capital Gains Tax?

Capital gains tax is a tax that is levied on the profit made from the sale of certain types of assets, such as real estate or stocks.

Commencing January 1^st 2023, capital gains tax, which had previously been levied at 5% on the gain made will henceforth be levied at 15%.

It is important to note that there are some exemptions that apply in the levying of capital gains tax.

Capital Gains Tax, often referred to as just CGT, is levied when a property is transferred.

In real estate transactions, CGT is levied on the vendor or transferor of the property against the capital gain that the vendor makes.

As the name suggests, the tax is levied on the capital gain that the vendor has made at the time of sale.

History of Capital Gains Tax in Kenya

Capitals gain tax was reintroduced in Kenya via the Finance Act of 2014. The tax came into effect on January 1’ 2015 following a 30-year hiatus since 1985. The tax has been levied at 5% since its reintroduction.

The operationalization of the tax came with some hitches between 2016 and 2019 as it transitioned between manual and electronic payment modes

Notably, a legal challenge between the Kenya Bankers Association and Kenya Revenue Authority when the latter twinned the payment of capital gains tax with the payment of Stamp Duty.

Newly Introduced Change in Capital Gains Tax Rate

Commencing January 1’ 2023, CGT will be levied at 15% as amended by the Finance Act of 2022 (Finance Act), which will see the rate of capital gains tax (CGT) levied increase from 5% per cent to 15%.

Calculation of Capital Gains Tax

By way of a formula, CGT could be expressed thus:

CGT                                               =                 5% (Net Transfer Value – Adjusted Cost of Property)

Where the
Net Transfer Value                     =                Transfer Value – Any Incidental Costs (that the vendor incurs on the sale)

Adjusted Cost of Property        =                Cost of acquisition + Enhancement Expenditure (including the cost of defending title over property and incidental costs of acquiring property)

Some Notable Exemptions to CGT in Kenya

Not all property transactions are subject to CGT.

For example, a property whose ownership is transferred to a beneficiary of an inheritance is exempt.

Similarly, the vendor of a residential property who has been the owner-occupier of that property for a period of at least three years immediately preceding its disposal is also exempt.

The Finance Act also describes what qualifies to be termed as a transfer of property for the purpose of levying CGT.

Here are some other real estate transactions where a property being transferred is exempted from the levying of capital gains tax:

• • • Land transferred by an individual whose transfer value is Kshs. 3 million or less.
    • Where land has been compulsorily acquired by the government for infrastructure development.
    • Agricultural property situated outside a municipality that is smaller than 50 acres in size.
    • Property transferred/sold to administer the estate of a deceased person within two years of the death of the deceased/court decision.
    • Land that is vested in a liquidator or receiver
    • Property transferred between spouses or former spouses or their immediate family.
    • Transfer of property for securing a debt/loan
    • Where deemed by Treasury to be in the public interest, transactions of exchange of property that occur when companies are restructured.

Documents to be Submitted as Proof of Payment of CGT

Property vendors are required to submit an acknowledgement slip for the payment of capital gains tax.

Alternatively, where an exemption applies, then an exemption slip should be submitted for the transfer to be registered.

Why Has Capital Gains Tax Been Increased

It’s simple. The government needs to raise taxes in an economy that has been hit by multiple shocks.

Drastically reduced activity in the real estate sector would account for lower volumes of sales/transfers and correspondingly lower collections of tax on these types of transactions.

It is no secret that real estate transaction volumes have taken a particularly heavy hit since 2020, causing jitters to many property investors in both commercial and residential property markets in the country.

Kenya, like many other countries globally, has been hard hit by the economic uncertainty that followed the unprecedented ravages of the Covid 19 pandemic.

Exacerbated by the looming global economic recession, high inflation rates, high cost of living, the rising cost of credit, an over-leveraged economy and a generally sour economic mood, the government will continue to seek out fiscal measures that will raise taxes.

By offering very high returns on public borrowing at a time of correspondingly high inflation, especially on infrastructure bonds, the government has stifled capital inflows in the property transfer market by draining out all the liquidity that could be directed at private investing.

In any event, very few attractive property investments can match the 14% ROI being offered on say public infrastructure bonds at this time.

At these rates, even traditional lenders would be more inclined to consider lower-risk assets (read here, government paper) than assets that have higher risk and take longer to realize.

Given the economic climate, raising CGT at this time makes sense. It is “low-hanging” fruit. Also, Kenya has had one of the lower rates for CGT on the continent. Perhaps this too may also provide justification for the hike..

Secretly, I have also heard the plausible arguments, albeit steeped in political innuendo, that the tripling of the tax overnight is targeted at weakening the political clout of a particular community. Of course, that could be dismissed as conspiratorial. However, in the current dispensation, it is clear that nothing is what it has been sold as. Or, even that what something is, and what it is touted to be are not necessarily the same thing.

A three-fold increase overnight does seem rather overstated, especially given the government’s stated goal to increase homeownership. The move is regressive, to say the least!

Likely Impact of Increase of CGT on Property Market

It would be unexpected that the rise in the cost of taxes would result in diminished sales. Not in the current economic climate. Fiscal policy planners would have anticipated this and would be fairly certain that investors’ need to liquidate real assets in favour of cash to either refinance their operations or adjust to the current inflationary pressures would far outweigh their desire to hold on to their property – especially if those properties are not currently generating any income.

Conclusion:

While capital gains tax is based on self-assessment, individuals transacting property that meet the thresholds for the levy of capital gains tax should ideally maintain proper records of their transactions, in particular for any improvements that they may undertake during the tenure of their ownership of the property. These will be crucial in the accurate calculation of any capital gains tax liability.

The increase in CGT will adversely affect investor perceptions but this will more than likely be short-lived in the grand design of things.