CAPITAL GAINS TAX

14th Oct. 2016

Ken Njuguna, Anjarwalla & Khanna Advocates

Background to the Capital Gains Tax

2

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.

Overview of Capital Gains Tax

3

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.

Legislative Framework
4

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.

Transactions Subject to CGT

5

COMPANY

property (as defined

under the IGPA)

marketable
securities
(Unlisted Shares)

road vehicles

INDIVIDUAL

interests in or
rights to land

marketable
securities
(Unlisted
Shares)

Property Subject to CGT contd

6

Offshore
Hold Co.

Currently no CGT on
sale of shares in
offshore vehicle

Kenyan
Company

CGT on sale of shares

Kenyan
Property

CGT on sale of
property

Capital Gains Computation

7

Transfer
Value

Adjusted
Cost

Chargeable
Gain

Chargeable gain x 5 % = CGT Payable

Illustration
YEAR

1980

ACTION

VALUE (KES)

1985

Bought 2 acre plot of land in

Eldoret Town
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

20,000

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

Key issues to Consider in CGT

9
1.
2.
3.
4.
5.

When does a transfer arise?

What is the value of the transfer?
How is the adjusted cost arrived at?
Are there any exemptions available?
Due date for paying CGT ?

When Does a Transfer Arise?

10

Disposal

on sale, exchange, conveyance of property

including by way of gift
whether for consideration or not

Destruction

on the loss, destruction or extinction of

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

Forfeiture

on the abandonment, surrender, cancellation,

forfeiture or expiration of substantially all
rights to property

11

When Does a Transfer Arise?

Contd
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

12

When Does a Transfer Arise?

Contd
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

13

Transfer Value - Arms Length

Transfers

14

Transfer Value - Non-Arms Length

Transfers
Bargain not
at arms
length

Consideration
cannot be
valued

Non-arms
length
transfers

Related party
transaction

Gifts

Market Value
15

Non-arms
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

Adjusted Cost
16
Historical Costs

Incidental Costs

Adjusted
Cost
Cost of
Improvement

Cost of
defending right
over property

Incidental Costs
17

transfer
costs
(including
stamp duty)

just and
reasonable
costs as
determined by
Commissioner

professional
fees including
legal,
valuation &
advertising

INCIDENTAL COSTS

Exemptions
18

EXEMPTIONS

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 deceaseds estate within 2 years of

finalisation of succession proceedings

Due Date
19

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 ?

Some Future Changes

20
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

1980

ACTION

VALUE (KES)

1985

Bought 2 acre plot of land in

Eldoret Town
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

20,000

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

Some Future Changes

22
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

100%

80%

60%

40%

30%

10 and above

25%

Illustration
YEAR

1980

ACTION

VALUE (KES)

1985

Bought 2 acre plot of land in

Eldoret Town
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

20,000

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

The ALN Network

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MOMBASA
Anjarwalla & Khanna
SKA House, Dedan Kimathi Avenue
PO Box 83156 80100, Mombasa, Kenya
T +254 41 2225090/6
F +254 41 2224996
E mba@africalegalnetwork.com

KENNETH NJUGUNA, Principal Associate

T +254 (0) 703 032 312
F +254 (0) 20 364 0201
E kkn@africalegalnetwork.com

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