Capital Gains Tax
A ‘Capital Gain’ is the difference between the purchase price and the selling price of certain assets. Subsequently, Capital Gains Tax (CGT) is the income tax payable on the gain/profit made on the disposal and eventual transfer of an immovable property by means exchange for a consideration or by way of a gift. All machinery, motor vehicles and listed securities are CGT exempt.
Capital Gains Tax is not new in Kenya having was introduced in 1975 but later suspended in 1985 in a bid to spur economic growth in the mining sector, real estate, deepen local participation in capital markets and boost investors’ confidence.
Application of Capital Gains Tax
KRA defines capital gain as the excess in the sale value over the adjusted cost of the property that is transferred with the difference subjected to a 5% tax.
The transfer value of the property is the amount or value of consideration or compensation for transfer, abandonment or loss of the property minus costs on such transfer. The adjusted cost is the sum of the cost of acquisition or construction of the property, expenditure for improvement and preservation of the property, the cost of defending the title or right over property if any; and the incidental costs of acquiring the property.
However, there are instances the sale of property results in a net loss which in our case shall be ‘capital loss.’ This loss is usually deferred or carried forward to offset against a gain of a similar nature at a future date. Capital Gains Tax is a transaction based tax and is payable after a transfer of property but payable by the 20th of the following month after the transfer.
Re-introduction of CGT
The reintroduction of CGT was after the Finance Act 2014 amendment of the Eighth Schedule of the Income Tax Act ‘ITA, ’ and CGT came to effect from 1st January 2015 and was largely expected to widen the tax net from the perceived well to do real estate sector. This is an additional tax to the stamp duty.
Certain transactions are CGT exempt as follows: –
a)income taxed elsewhere as in the case of property dealers;
b)issuance by a company of its shares and debentures;
c) Transfer of machinery including motor vehicles;
d) Disposal of property to administer the estate of a deceased person;
e) Vesting of property in the hands of a liquidator or receiver;
f) Transfer of individual residence occupied by the transferor for at least three years before the transfer;
g) Compensation by Government for property acquired for infrastructure development;
h) Transfer of asset between spouses as part of divorce settlement;
i) Sale of land by an individual where the proceeds are less than Kshs. 30,000;
j) Sale of agricultural land by individuals outside gazetted townships where the property is less than 100 acres
k) Exchange of property necessitated by incorporation, recapitalization, acquisition, amalgamation, separation, dissolution or similar restructuring involving one or more companies which are certified by the Cabinet Secretary to have to be done in the public interest
l) Transfer of investment shares by a body exempted under Paragraph 10 of the First Schedule
m) Transfer of investment shares by retirement benefits scheme registered with Commissioner