Capital Gains Tax (CGT) in Kenya was suspended in 1985 but was reintroduced by the Finance Act, 2014. It took effect from 1st January 2015. Capital Gains Tax is a form of income tax that is charged on the gain an individual or a company makes after selling or disposing property. It is the gain made that is taxed not the amount of money received.
In Kenya, Capital Gains Tax is applicable to the transfer of property situated in Kenya. Property is defined as land, buildings and securities (shares and bonds). A transfer of property is said to have occurred when property is sold, exchanged, conveyed or otherwise disposed of in any manner including by way of a gift. Transfer of property also happens when there is loss, destruction or extinction of property. When property is abandoned, surrendered, cancelled or forfeited, it is also said that a transfer has taken place.
You may ask where is the gain in case of loss, damage or extinction of property. The gain may arise from compensation for the loss or damage.Capital Gains Tax must be paid on any compensation paid for loss or damage of the property unless the compensation is used to restore theproperty to its original state.
The person responsible for paying Capital Gains Tax is the person transferring the property and to whom the benefit is accruing. The person can be resident or non-resident, natural or corporate.
The rate of Capital Gains Tax in Kenya is 5% of the net gain. It is a final tax because the gain is not subject to further taxation. When Kenya is compared with its regional counterparts, its rate of Capital Gains Tax is the lowest. Uganda charges Capital Gains Tax at the rate of 30% on business assets while Tanzania charges it at 20%. South Africa is at 40% while in Nigeria and Ghana it is at 10%.
Since Capital Gains Tax is transaction based,in the case of a land transfer it falls due and is payable on or before the date of lodging application documents for the transfer of property at the lands office. However, it should not be later than the 20th day of the month following that in which the transfer was made.
It is not from all type of gain from transfer of property that Capital Gains Tax must be paid. There are certain exemptions. Securities that are traded on a securities exchange such as the Nairobi Securities Exchange are exempted from Capital Gains Tax. However, securities traded off the exchange through the Over-The-Counter market will attract capital gains tax at the rate of 5%. Securities include shares and bonds. Other Capital Gains Tax exemptions include
- Income that is taxed elsewhere for instance property dealers.
- If a company issues its own shares or debentures.
- Transfer of machinery including motor vehicles
- When property is disposed when administering the estate of a deceased.
- When property is being vested in the liquidator or receiver.
- Transfer of an individual residence occupied at least 3 years immediately before the transfer.
- Sale of land where the proceeds is less than Ksh. 3 million.
- Sale of agricultural land by individuals outside gazetted townships that is less than 50 acres.
- Exchange of property that is necessitated by incorporation or restructuring of a company where the cabinet secretary certifies it was done in public interest.
- Transfer of property only for securing a debt or loan.
- Transfer of an asset between spouses and also as part of divorce settlement, or former spouses or immediate family. Immediate family means children of the spouse or former spouse.
- Property transferred within two years of the death of the deceased for the purpose of administering the estate of a deceased person.