- What is Capital Gains Tax?
Capital Gains Tax (CGT) is a tax chargeable on the whole of a gain which accrues to a company or an individual on or after 1st January, 2015 on the transfer of property situated in Kenya, whether or not the property was acquired before 1st January, 2015.
- What is the rate of tax?
The rate of tax is 5% of the net gain. It is a final tax and cannot be offset against other income taxes.
- What is property?
Property is defined in the law (Eighth Schedule to the Income Tax Act). It includes land, buildings and securities.
Marketable securities are defined to include a security capable of being sold and stock as defined in Section 2 of the Stamp Duty Act.
However, transfer of securities traded on any securities exchange licensed by the Capital Markets Authority is not chargeable to tax.
- Who is liable to pay the tax?
The tax is to be paid by the person (resident or non-resident) transferring the property, that is, the transferor. The transferor can either be an individual or a corporate body.
- What constitutes a transfer?
A transfer takes place: –
- a) where a property is sold, exchanged, conveyed or disposed of in any manner (including by way of gift); or
- b) on the occasion of loss, destruction or extinction of property whether or not compensation is received; or
- c) On the abandonment, surrender, cancellation or forfeiture of, or the expiration of rights to property.
- How do you determine the net gain?
The net gain is the excess of the transfer value over the adjusted cost of the property that has been transferred. It is this excess that is subjected to tax at 5%.
- The Transfer value of the property is the amount or value of consideration or compensation for transfer of the property less incidental costs on such transfer.
- The Adjusted cost is the sum of the cost of acquisition or construction of the property; expenditure for enhancement of value and/or preservation of the property; cost of defending title or right over property, if any; and the incidental costs of acquiring the property.
- The adjusted cost shall be reduced by any amounts that have been previously allowed as deductions under Section 15(2) of the Income Tax Act.
- The owner of property/seller has the responsibility of proving the cost of acquisition of the property and should therefore provide this information. However, in instances where this information is not available, then the amount of the consideration for the acquisition of the property shall be deemed to be equal to the market value of the property at the time of the acquisition or to the amount of consideration used in computing stamp duty payable on the transfer by which the property was acquired, whichever is the lesser.
- How will related party transactions be treated?
Two parties are related if:-
a.) Either person participates directly or indirectly in the management control or capital of business of the other; or
b.) A third person participates directly or indirectly in the management control or capital of business of both.
Where there is concern that a related party transaction may have led to reduction in the transfer value with a view to minimizing the capital gains tax, the Commissioner will make necessary adjustments and/or revaluation to determine the market price
- What is the due date/tax point?
It is a transaction based tax and should therefore be paid on or before the date of lodgment of application for transfer to the relevant Lands Office but not later than the 20th day of the month following that in which the transfer was made.
Where a transfer date is different from the settlement date then the transfer date will be the tax point in line with International Accounting Standards.
- How is the tax to be declared?
The taxpayer will do a self-assessment to determine the gain upon which tax is computed. The computations are subject to Commissioner’s confirmation of correct gain as the basis of tax computation.
The transferor shall complete the relevant declaration form (CGT form), upon transfer of any property, compute the gain and pay the tax thereon accordingly. Form CGT 1 will be used upon transfer of land and buildings; Form CGT 2 will be used in the case of marketable securities while Form CGT 3 will be used to declare exempted/excluded transactions. The Forms are available on iTax and you may need an accountant or an advocate to assist you.
Capital losses are deductible against Capital gains in the year of income the losses are made and if not exhausted may be carried forward and deducted from capital gains in subsequent years of income – Section 15(3)(f) of the Income Tax Act
The 10vyear limitation for carrying forward of losses is applicable. A taxpayer may apply for extension of the period for carrying forward of losses upon expiry of the 10 years. The application will be considered by the Commissioner and a recommendation made to the Cabinet Secretary.
- What documents/information will be required?
- Completed CGT form by the seller.
- Copy of Sale/Transfer Agreement of the property.
- Proof of the incidental costs related to the acquisition and transfer of the property.
- A copy of the title deed or ownership document for the property
- Report from a registered valuer for property transactions between related parties
- Any other document/information that the Commissioner may require.
- Are there any exemptions/exclusions from capital gains tax?
Certain transactions are exempted as follows: –
- income that is taxed elsewhere as in the case of property dealers;
- issuance by a company of its own shares and debentures;
- transfer of machinery including motor vehicles;
- disposal of property for purpose of administering the estate of a deceased person;
- vesting of property in the hands of a liquidator or receiver;
- transfer of individual residence occupied by the transferor for at least three years before the transfer;
- transfer of asset between spouses and also as part of divorce settlement;
- sale of land by an individual where the proceeds is less than Kshs. 3 Million;
- sale of agricultural land by individuals outside gazetted townships where the property is less than 50 acres;
- Exchange of property necessitated by: incorporation, recapitalization, acquisition, amalgamation, separation, dissolution or similar restructuring involving one or more companies which is certified by the Cabinet Secretary to have been done in public interest;
- transfer of securities by a body exempted under Paragraph 10 of the First Schedule;
- transfer of securities by retirement benefits scheme registered with Commissioner (this does not include foreign registered retirement schemes);
- Transfer of securities traded on any securities exchange licensed by the Capital Markets Authority.
- Transfer of property for the purpose only of securing a debt or loan or on a transfer by a creditor for the purpose only of returning property used as a security for a debt or a loan;
- Transfer of an asset between spouses or former spouses or their immediate family where immediate family means children of the spouse or former spouse.
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