CAPITAL GAINS TAX Ken Njuguna, Anjarwalla & Khanna Advocates 14 - - PowerPoint PPT Presentation

CAPITAL GAINS TAX

Ken Njuguna, Anjarwalla & Khanna Advocates

14th Oct. 2016

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Background to the Capital Gains Tax

 Capital Gains Tax was re-introduced effective from 1st

January 2015 By the Finance Act, 2014.

 It was suspended in 1985 with intention of nurturing

growth in the real estate and capital markets sectors.

 Income was taxed. Capital was spared from taxation.

This led to claims that the tax system was not equitable.

 Expanded Budget Occasioned by Devolution forced the

Treasury to go overdrive to expand revenue base for Government financing; CGT was a low hanging cherry.

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Overview of Capital Gains Tax

 Para 2 of the Eighth Schedule: any gain realised by a person

(whether a company or an individual) on the transfer of property situated in Kenya, constitutes taxable income under section 3(2)(f) of the ITA.

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Legislative Framework

S.3 (2)(f): tax is chargeable on capital gains. S.15 (3)(f) : taxpayers can offset current year capital losses against current year capital gains.

• Sec. 34(1)(h) : Gains arising from the transfer of

property shall be taxed at a rate of 5%. Eighth Schedule: any gain realised on the transfer of property constitutes taxable income.

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Transactions Subject to CGT

COMPANY INDIVIDUAL

interests in or rights to land marketable securities (Unlisted Shares)

property (as defined under the IGPA) marketable securities (Unlisted Shares) road vehicles

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Property Subject to CGT cont’d

Offshore Hold Co. Kenyan Company Kenyan Property Currently no CGT on sale of shares in

• ffshore vehicle

CGT on sale of shares CGT on sale of property

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Capital Gains Computation

Chargeable gain x 5 % = CGT Payable

Transfer Value Adjusted Cost Chargeable Gain

Illustration

YEAR ACTION VALUE (KES)

1980 Bought 2 acre plot of land in Eldoret Town 20,000 1985 Cost of building office block 650,000 1989 Cost of putting up perimeter wall 250,000 Adjusted cost 920,000 2016 Property sold in 2016 300,000,000

Amount subject to Capital Gains Tax (CGT): KES 300,000,000 – KES 920,000 = KES 299,080,000 (Transfer Value – Adjusted cost = Chargeable gain) CGT = 299,080,000 X 5% = KES 14,945,000

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• 1. When does a transfer arise?
• 2. What is the value of the transfer?
• 3. How is the adjusted cost arrived at?
• 4. Are there any exemptions available?
• 5. Due date for paying CGT ?

Key issues to Consider in CGT

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When Does a Transfer Arise?

• on sale, exchange, conveyance of property

including by way of gift

• whether for consideration or not

Disposal

• on the loss, destruction or extinction of

property

• unless compensation is received and is used

to re-instate the property within one year

Destruction

• on the abandonment, surrender, cancellation,

forfeiture or expiration of substantially all rights to property

Forfeiture

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When Does a Transfer Arise? Cont’d

There is no transfer of property on:

transfer to secure a debt/loan i.e. mortgage issuance by a company of its shares i.e. subscription for shares vesting in personal representative and from personal representative to beneficiary pursuant to succession process

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When Does a Transfer Arise? Cont’d

There is no transfer of property on:

vesting in a liquidator/ official receiver transfer between spouses / immediate family pursuant to divorce settlement transfers between a trustee and a beneficiary Transfer of assets to immediate family or to a family owned company

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Transfer Value - Arm’s Length Transfers

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Transfer Value - Non-Arm’s Length Transfers

Non-arm’s length transfers

Bargain not at arm’s length

Gifts Related party transaction Consideration cannot be valued

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Market Value

Non-arm’s length transaction Transfer value market value of property at the time of transfer. Adjusted cost lower of: market value of property at the time of acquisition consideration amount used in computing stamp duty

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Adjusted Cost

Historical Costs Incidental Costs Cost of Improvement Cost of defending right

• ver property

Adjusted Cost

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Incidental Costs

INCIDENTAL COSTS

professional fees including legal, valuation & advertising transfer costs (including stamp duty) just and reasonable costs as determined by Commissioner

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Exemptions

EXEMPTIONS

where income is chargeable to other taxes transfer of machinery subject to wear & tear deductions private residence occupied by owner for 3 years transfer value below K.Shs. 3,000,000/= agricultural property of less than 50 acres outside a municipality sale under administration of deceased’s estate within 2 years of finalisation of succession proceedings

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 Land and buildings – On or before transfer is

lodged at Lands Registry (Finance Act 2015)

 Unlisted shares – No clarity but view is that CGT

should be paid before registration

 Real estate transactions - How will Seller fund the

CGT payment ?

Due Date

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Some Future Changes…

• 1. Indexation

 The Adjusted Cost is increased by the multiplying

with a factor based on the Consumer Price Index or the Retail Price Index.

 Example of an indexation table set out below.

INDEXATION 1980 245.30 1990 175.25 2000 72.30 2010 10.50 2014 2.56 2016 1.00

Illustration

YEAR ACTION VALUE (KES)

1980 Bought 2 acre plot of land in Eldoret Town 20,000 1985 Cost of building office block 650,000 1989 Cost of putting up perimeter wall 250,000 Adjusted cost 920,000 2016 Property sold in 2016 300,000,000

Amount subject to Capital Gains Tax (CGT): KES 920,000 x 245.30 = KES 225,676,000 KES 300,000,000 – KES 225,676,000 = KES 74,324,000 CGT = KES 3,716,200 CGT WITHOUT INDEXATION = KES 14,945,000

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Some Future Changes…

2.

Taper Relief



Tapering relief works by discounting the amount of chargeable gains that are subject to CGT.



The longer the property is held the higher the discount applied to the chargeable gains.



An example of tapering relief table is set out below (based on the UK model)

Number of whole years in qualifying period Percentage of gain chargeable 1 100% 3 80% 5 60% 7 40% 9 30% 10 and above 25%

Illustration

YEAR ACTION VALUE (KES)

1980 Bought 2 acre plot of land in Eldoret Town 20,000 1985 Cost of building office block 650,000 1989 Cost of putting up perimeter wall 250,000 Adjusted cost 920,000 2015 Property sold in 2015 300,000,000

Amount subject to Capital Gains Tax (CGT): KES 300,000,000 – KES 920,000 = KES 299,080,000 TAPER RELIEF = KES 299,080,000 x 25% CGT = 74,770,000 X 5% = KES 3,738,500 CGT WITHOUT TAPER RELIEF= KES 14,945,000

Questions

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Legal Notice: these materials are for training purposes only and do not constitute legal or other professional advice.

NAIROBI Anjarwalla & Khanna The Oval, 3rd Floor Junction of Ring Road Parklands and Jalaram road PO Box 200-00606, Sarit Centre, Nairobi, Kenya T +254 (0) 20 364 0000, + 254 (0) 703 032 000 F +254 (0) 20 364 0201 E nbi@africalegalnet.com MOMBASA Anjarwalla & Khanna SKA House, Dedan Kimathi Avenue PO Box 83156 – 80100, Mombasa, Kenya T +254 41 2225090/6 F +254 41 2224996 E mba@africalegalnetwork.com KENNETH NJUGUNA, Principal Associate T +254 (0) 703 032 312 F +254 (0) 20 364 0201 E kkn@africalegalnetwork.com