In the 2019/20 budget read on 13th June 2019, the Treasury Cabinet Secretary announced an increase in capital tax by more than double its current rate, from 5% to 12.5%. This shocked and angered many property owners, seeing that the tax had just been reintroduced in 2015, after being suspended since 1985. This is, therefore, a good time to find out the types of transactions that are exempt from this tax.
Before going any further, capital gain tax is tax that is levied on transfer of property situated in Kenya, acquired on or before January 2015. This tax is on the profit made, not on the total cost of the property. It is paid by the person selling the property, legally called the transferor. The tax is charged on the net gain, which is exclusive of the acquisition and the incidental cost. It is referred to as a final tax, which means that once it is paid, it is not subject to any further taxation.
What type of transactions are exempt from Capital Gains Tax? The first is income that is already taxed elsewhere. For example, property sold by a property dealer is exempt, because this dealer is already taxed for this profit under his individual income tax. Also, a company issuing its own shares and debentures is exempt from this tax. Another exemption is in the case where a property should be disposed for purposes of administering the estate of a deceased person. Profit made from such sales is not subject to capital gains tax.
In the event where a property should be transferred from one spouse to another as part of a divorce settlement, such property is not taxed under capital gains tax. This exemption also applies where a piece of property is a private residence, and the owner was living there continuously for the three years immediately preceding the transfer.
What about agricultural property? For it to be exempt, it has to be less than 100 acres in acreage, and it must be outside a municipality or urban area. If it within a municipality or urban area, it should be less than 50 acres. As a relief to small property owners, though, if the transfer value is less than Ksh 3 Million, the profit is exempt from capital gain tax.
There are instances where the relevant Cabinet Secretary finds a certain restructuring of a corporate entity, that involves one or more companies, to be of public interest. In such cases, the transfer of property in exchange for other pieces of property is exempt from capital gains tax.
Besides exempted transactions, there are others that are referred to as excluded transactions. These are excluded from capital gains tax because they are deemed to be non-profit transactions. Transactions such as charging property as security for a loan, transfer of property to an heir, vesting of a company’s property upon a liquidator, transfer of property from a trustee to a liquidator, transfer of property to a company that is owned by the transferor and his family, etc, are examples of excluded transactions. In most circumstances, no profit is made on such transactions, but in the event that there is profit, it is not subject to capital gains tax.
If your property falls under any of these categories during transfer, you should apply for approval from the Kenya Revenue Authority. This application is done online, on the iTax portal.
By Andrew Wanga & Victory Wanjohi