For a very long time, the Kenyan government has been getting 5% as capital gain every time a property owner sells a piece of land. However, in the new budget statement (2019/2020 budget) presented, Henry Rotich, who is now the Treasury Cabinet Secretary, proposes a double tax where the capital gain has doubled to 12.5% and will be implemented next month.
Reason for the Increase and Available Exemptions
There will be a reduced income for those selling the land, as well as intangible and securities assets.
Mr. Rotich added that to harmonize the rate with other jurisdictions, ensure there is fairness, and enhance equity, the government will need to review the Capital Gains Tax (CGT) legislation after four years of implementation.
He added that in the East Africa Community, the CGT ranges from 20% to 30%, which means that the steep rise is still below the regional average. Nevertheless, he offered official pardons to companies moving from one location to restructure their businesses. He exempted such entities from this tax to allow a smooth restructuring.
In his statement, he mentioned that this measure would allow corporate entities to restructure their operations for market efficiency and efficiency.
On the KRA website, the current information shows that the exemptions available are offered on property transfer between spouses as a part of a divorce statement or property disposal meant for administering the estate of a deceased person.
In addition, another exemption is the sale of agricultural property in an area less than 100 acres, and the property is situated outside an urban or a municipality area.
The previous 5% CGT was introduced four years ago, and the government hopes that the latest move will help them accumulate higher tax revenue to help finance the 3.02 trillion budget.
He concluded by stating that the whole purpose of this
implementation is to enhance revenue and increase the tax base.
Affected Market Areas By Double Tax
The properties targeted by this tax include;
- Marketable securities
- Buildings
- Land
Let’s have a quick look at some countries within East Africa that implemented double taxation agreements.
East African Nations with Double Tax Treaties
- In Tanzania, their tax capital gains are at the rate of 10% for locals and 20% for foreigners.
- In Uganda, their CGT is at 30%, although the rates vary from 25% to 45% for mining firms based on the profits the mine gets.
- Burundi charges 15%.
- Rwanda introduced a CGT of 5% through the Income Tax Act (2018).
What Does this Double Tax Mean To The Property Sellers?
Double taxation in Kenya, introduced in 2019, affects both property sellers and buyers by increasing the cost of real estate transactions. It refers to the imposition of two separate taxes on the same income or transaction. This has financial implications for both parties involved in property deals.
Impact of Double Tax on the Property Sellers
- Higher Tax Burden – Sellers must pay both Capital Gains Tax (CGT) at 5% and Withholding Tax (WHT), reducing their net proceeds.
- Reduced Profit Margins – Increased tax liabilities mean lower take-home profit from property sales.
- Slower Transactions – High tax costs may discourage sellers, reducing market activity.
Impact on Property Buyers
- Increased Property Prices – Sellers often pass on tax costs to buyers, raising prices.
- Higher Stamp Duty – Buyers pay stamp duty (ranging from 2% to 4%), adding to acquisition costs.
- Reduced Affordability – The added financial burden makes property ownership harder for buyers.
Ways to Reduce Double Tax on Property in Kenya
The introduced taxes made the property deals more expensive. However, you can make some exemptions and smart planning to help reduce these costs. In this section, we will explain how you can legally pay less tax when dealing with property.
Structuring the Sale Price
You can agree on a price that includes taxes so the buyer covers some of the tax costs. This helps reduce your tax burden and makes the deal fairer. For example, instead of lowering your selling price, you can keep it the same and let the buyer pay a bit more to cover part of the tax. This way, you don’t lose too much money from the sale.
Use Legal Tax Deductions
You can reduce the tax you pay by deducting costs like lawyer fees, valuation fees, and agent commissions. This lowers the total taxable profit from the sale. For example, if you spend money on marketing the property or paying for land rates, these costs can be deducted before calculating your tax. Keeping proper records of these expenses will help you prove them to tax authorities.
Save On Double Tax by Owning Property Through a Company
Owning property under a company instead of in your personal name may reduce taxes. Companies sometimes pay lower tax rates, which can save you money in the long run. If you own multiple properties, registering a company to manage them can also help with tax planning. This can be useful for landlords and investors looking to grow their real estate business.
How to Follow Tax Rules and Avoid Penalties
It’s important for both buyers and sellers to follow tax rules to avoid fines and problems. Knowing the taxes you need to pay and paying them on time will help you avoid issues. In this section, we will give you simple steps to help you stay on track and follow the tax rules when buying or selling property in Kenya.
Know the Taxes You Must Pay
You need to know the taxes you must pay when buying or selling property to avoid any surprises. For sellers, there’s Capital Gains Tax (CGT), which is based on the profit you make from selling the property. Buyers pay Stamp Duty, a tax on the property’s value, and sometimes Withholding Tax (WHT), which the buyer deducts and pays directly.
Verify Buyer’s Tax Payments
You must file and pay your taxes on time to avoid penalties. For example, Capital Gains Tax (CGT) is due within 30 days after you sell a property. Make sure you submit your tax returns and payments before the deadline.
Keep Proper Records
You should keep all your transaction documents, receipts, and agreements safe. These records will help you prove that you paid the correct taxes and any deductions you made. Once you keep them safe, you can easily provide evidence if the tax authorities ask for it. This helps you avoid issues and ensures you’re following the tax rules.
Get Professional Help
It’s a good idea to get help from a tax expert or lawyer to make sure you follow all the tax rules correctly. They can guide you through the process, help you understand what taxes you need to pay, and even find ways to reduce your tax burden legally. This will give you peace of mind and ensure everything is done properly.
Verify Buyer’s Tax Payments
If you’re selling property, make sure the buyer correctly takes out and pays the Withholding Tax (WHT). This will help you avoid tax issues later because the buyer is responsible for paying the tax. Checking this ensures you’re not held accountable for any missed payments.
Take away
In conclusion, property sellers in Kenya now face double taxation with both Capital Gains Tax (CGT) and Withholding Tax (WHT). This adds extra costs to selling property. As the sellers, you need to understand these taxes to avoid surprises. By staying organized and getting professional advice, you can manage these taxes more easily and reduce their financial impact.