Changes continue to shake up Kenya’s property industry. The most recent was on 21 June 2022, when Kenya’s President signed the Finance Act, 2022 into law (the Act). The Finance Act of 2022 amended the Income Tax Act (ITA) by raising the capital gains tax (CGT) rate from 5% to 15%. The tax, which went into effect on Monday, January 2, is expected to impact Kenyan real estate investments and private equity deals.
Understanding this change and its impact on the real estate market is crucial for anyone involved in property transactions. Dennkarm Prime Properties Limited, located in Kikuyu town, is dedicated to providing insights and guidance to help you navigate these changes effectively. This comprehensive guide covers what you need to know about the increased CGT and its implications.
Table of Contents
- What is Capital Gains Tax?
- Exemptions on Capital Gains
- Implications of Higher Capital Gains Tax on the Real Estate Market
- Potential Implications on Sectional Titles
- How to Pay CGT in Kenya
- Conclusion
1. What is Capital Gains Tax?
Capital Gains Tax (CGT) is a tax levied on the profit realized from the sale of a non-inventory asset. In the context of real estate, CGT is applied to the difference between the selling price of the property and its original purchase price. The increase in CGT to 15% means that property sellers will now have to pay a higher percentage of their profit as tax.
Why the Increase?
The Kenyan government increased CGT to enhance revenue collection and ensure a fair contribution from those benefiting from capital gains. This change aligns with international practices, where capital gains are often subject to taxation.
Calculation Example
For example, if you bought a property for Ksh 5,000,000 and sold it for Ksh 7,000,000, your capital gain is Ksh 2,000,000. At a CGT rate of 15%, you would owe Ksh 300,000 in tax.
2. Exemptions on Capital Gains
Certain exemptions apply to CGT in Kenya, which can significantly affect the tax liability for property sellers. Understanding these exemptions can help you plan your transactions better.
Principal Residence
The sale of a primary residence is exempt from CGT if the property has been occupied by the owner for at least three years before the sale. This exemption encourages homeownership and provides relief to those selling their homes.
Transfer to Immediate Family
Transfers of property between immediate family members, such as spouses, parents, and children, are exempt from CGT. This provision helps in estate planning and the seamless transfer of assets within families.
Transfer of Agricultural Property
Agricultural property of less than 50 acres outside of a municipality, township, or urban area is exempt from CGT. This exemption supports agricultural development and protects farmers from additional tax burdens.
Other Exemptions
Additional exemptions may include property transferred as a gift to a charitable organization, property transferred under a will, and compensation received from compulsory acquisition of property by the government.
For more detailed information on exemptions, visit the Kenya Revenue Authority (KRA) website.
3. Implications of Higher Capital Gains Tax on the Real Estate Market
The increase in CGT has several implications for the real estate market in Kenya, affecting both sellers and buyers.
Impact on Property Prices
Sellers may attempt to pass on the higher tax cost to buyers by increasing property prices. This could lead to a short-term increase in property prices, potentially slowing down the market as buyers negotiate or seek more affordable options.
Market Activity
Higher CGT could discourage speculative buying and selling, leading to a more stable market. Investors may hold onto properties for longer periods, reducing market volatility and promoting sustainable growth.
Investment Decisions
Investors will need to factor in the higher CGT when making investment decisions. This may lead to more cautious and strategic investments, focusing on properties with higher potential for appreciation to offset the increased tax burden.
Property Development
Developers may also feel the impact of higher CGT, especially when selling completed projects. The increased tax cost could affect profitability and influence the pricing of new developments.
Potential for Increased Compliance
The higher CGT rate may lead to increased compliance and better tax collection. Property sellers will need to ensure accurate reporting and payment of CGT to avoid penalties and legal issues.
4. Potential Implications on Sectional Titles
Sectional titles, such as apartments and condominiums, represent a significant portion of the real estate market in urban areas. The increase in CGT has specific implications for these types of properties.
Impact on Affordability
Higher CGT could affect the affordability of sectional titles, as sellers factor in the increased tax when setting prices. This could make it more challenging for first-time buyers to enter the market.
Resale Market
Owners of sectional titles may be more inclined to hold onto their properties for longer periods to maximize their returns, leading to reduced availability in the resale market. This could create opportunities for new developments to fill the gap.
Developer Strategies
Developers of sectional titles may need to adjust their pricing strategies and marketing efforts to attract buyers. Offering incentives, such as flexible payment plans or discounts, could help offset the impact of higher CGT on potential buyers.
5. How to Pay CGT in Kenya
Paying CGT in Kenya involves a specific process, and it is essential to ensure compliance with tax regulations to avoid penalties. Here is a step-by-step guide on how to pay CGT in Kenya:
Step 1: Obtain a Valuation Report
Before selling a property, obtain a valuation report from a registered valuer. This report will help determine the market value of the property and calculate the capital gain.
Step 2: Calculate the Capital Gain
Calculate the capital gain by subtracting the property’s purchase price and any allowable expenses (such as legal fees, valuation fees, and improvement costs) from the selling price.
Step 3: Complete the CGT Form
Fill out the CGT form (IT1C) available on the KRA website. Provide accurate details about the property, the transaction, and the calculated capital gain.
Step 4: Submit the Form and Pay the Tax
Submit the completed CGT form and pay the tax through the KRA online portal (iTax). Ensure that you pay the tax within 30 days of transferring the property to avoid penalties.
For more detailed instructions, visit the KRA iTax Portal.
6. Conclusion
The increase in capital gains tax to 15% in Kenya has far-reaching implications for property sellers and the real estate market. Understanding CGT, its exemptions, and the potential impact on property transactions is crucial for making informed decisions. At Dennkarm Prime Properties Limited, we are committed to providing valuable insights and guidance to help you navigate these changes effectively.
For more information on real estate investments and tips for managing capital gains tax, visit Kenya Revenue Authority (KRA) and HassConsult.
Additional Resources
- Kenya Revenue Authority (KRA) – Detailed information on capital gains tax and other property-related taxes.
- HassConsult – Real estate market insights and trends.
- Law Society of Kenya (LSK) – Find reputable legal professionals for property transactions.
Dennkarm Prime Properties Limited
Dennkarm Prime Properties Limited is here to assist you in your real estate journey, providing the support and expertise needed to succeed in the evolving market. We look forward to helping you achieve your investment goals.
