Buying and selling of property is one of the most thriving businesses in Kenya. Whether dealing with the sale of shares, land or buildings one can get good returns if transactions happen in a favourable market.
After the negotiation on sale of certain property concludes, then the seller or transferor of the property needs to bear in mind that they have an obligation to pay Capital Gains Tax.
Capital Gains Tax (CGT) is tax levied on transfer of property situated in Kenya under acquisition on or before January 2015. The seller or transferor of property pays 15% of the gain as capital gains tax rate. It is a final tax and therefore not subjected to further taxation after payment.
There are three CGT types listed under Payments functionality in the iTax system. CGT 1 is for land and buildings, CGT1P in case of land and buildings by a Partnership, CGT 2 is for shares, CGT2P in case of Shares by a Partnership and CGT 3 is for the exemptions.
Property transfer from one party to another could be through different ways such as gifting, inheritance, selling etc. It is important to note that not all cases of transfer of property attract payment of CGT. The exempt situations include; income that is taxed elsewhere, sale of land by individual where the proceeds is less than 3 million, marketable securities, disposal of property for purpose of administering the estate of a deceased person and transfer of property between spouses as part of divorce settlement. Other exempt situations are, vesting property to a liquidator or receiver, transfer of machinery including motor vehicles, just to mention but a few.
When computing CGT, three terms are used. One is the net transfer value meaning the transfer value less incidental expenses to the transfer. The second term is the adjusted cost of the property meaning the cost of acquisition, expenditure for enhancement or preservation of the property i.e. cost of defending title over property and incidental costs of acquiring property. The third term is Capital Gain or Loss meaning the Net transfer value less the adjusted cost of the property. When the seller enters all these details in system during the payment process, then the amount payable will be 15% of the gain made.
By Margaret Gachina
Tax Education