Project: Blogpost Article
Date of Publication: March 28, 2024
Live project link: Capital Gains Tax: What You Need To Know - (taxaffix.com)
Capital Gains Tax: What You Need To Know
What is Capital Gains Tax (CGT)?
Capital Gains Tax (CGT) is a tax that is levied on gains that a company, individual, or partnership makes from the transfer of property situated in Kenya. CGT is applied regardless of whether the property was acquired before January 1, 2015.
In addition, CGT is also levied on gains that arise when a foreign entity sells shares or comparable interests. In this case, it is established that the entity derives more than 20% of its value directly or indirectly from immovable property situated in Kenya. This is effective July 1, 2023.
Similarly, CGT will also apply where a non-resident person who holds more than 20% of the share capital of a Kenyan company directly or indirectly disposes of their interest. This is effective July 1, 2023.
Note that the transferor is the one who declares and pays the CGT.
Capital Gains Tax Rate
Effective January 2023, the Kenya Revenue Authority (KRA) revised CGT from 5% to 15% of the total net gain.
You derive net gain by subtracting acquisition and incidental costs from sales proceeds. Incidentally, CGT applies to gains arising from property sales.
CGT serves as a final tax. Therefore, the capital gain cannot be taxed further after paying the 15% CGT. However, you can carry forward capital losses to offset future capital gains.
What constitutes a transfer of property?
The following situations in Kenya constitute transfers of property:
a). When property is sold, exchanged, gifted to an individual or entity, or otherwise gotten rid of, whether money is involved or not,
b). When an entity receives money as compensation for the loss, destruction or extinction of property. However, CGT does not apply when that money is used to replace the property in essentially the same form and place within a year or a longer period approved by the Commissioner.
c). When, during a company’s dissolution, property rights are given up, cancelled, or expired, including giving up shares or bonds.
Deductible Expenses of Capital Gains Tax
i. Acquisition/Construction cost
ii. Loan/Mortgage interest
iii. Advertising cost for finding a buyer
iv. Property valuation costs
v. Legal fees
vi. Property enhancement costs.
These deductible expenses reduce the taxable capital gain, thus lowering the taxpayer’s tax liability.
Exemptions from CGT
The following scenarios exempt property from CGT liability:
i. Income that is taxed elsewhere, as in the case of property dealers.
ii. When a company issues investors or the public with its own shares and bonds for purchase.
iii. Transferring property solely to secure a debt or loan.
iv. When a creditor transfers property in order to return property that was used as security for a debt or loan.
v. When a personal representative transfers property to a person who is a beneficiary during the administration of a deceased person’s estate.
vi. Transfer of assets between spouses or to immediate family.
vii. Transfer of assets to a company where spouses or a spouse and immediate family hold 100% shareholding.
viii. Transfer of assets between former spouses as part of a divorce settlement or a bona fide separation agreement.
ix. Transfer of a private residence where the individual owner has occupied the residence continuously for the three-year period immediately prior to the transfer concerned.
x. Transfer of property because of internal restructuring within a group that has existed for at least 24 months, and does not involve a transfer of property to a third party.
How to pay Capital Gains Tax
The following deadlines determine the payment for CGT, whichever occurs first:
a). When the seller receives the full purchase price from the buyer, or
b). When the person receiving the property is registered under the transfer instrument.
You initiate payment for CGT online via iTax. You can pay the tax using cash, a check, or an RTGS bank transfer.
In conclusion,if you fail to comply with capital gains tax obligations, including non-payment or late filing, KRA may impose penalties and interest charges. CGT laws and regulations are complex and subject to change. Therefore, we recommend seeking professional advice from tax consultants or accountants. They will help you ensure compliance. Furthermore, they will help you minimise tax liabilities and optimise your tax planning strategies.
