CAPITAL GAINS TAX Ken Njuguna, Anjarwalla & Khanna Advocates 14 th Oct. 2016
Background to the Capital Gains Tax 2 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.
Overview of Capital Gains Tax 3 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.
Legislative Framework 4 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.
Transactions Subject to CGT 5 COMPANY INDIVIDUAL property (as defined interests in or under the IGPA) rights to land marketable securities (Unlisted Shares) marketable securities (Unlisted Shares) road vehicles
Property Subject to CGT cont’d 6 Currently no CGT on Offshore sale of shares in Hold Co. offshore vehicle Kenyan CGT on sale of shares Company CGT on sale of Kenyan property Property
Capital Gains Computation 7 Transfer Adjusted Chargeable Value Cost Gain Chargeable gain x 5 % = CGT Payable
Illustration YEAR ACTION VALUE (KES) 1980 Bought 2 acre plot of land in 20,000 Eldoret Town 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
Key issues to Consider in CGT 9 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 ?
When Does a Transfer Arise? 10 • on sale, exchange, conveyance of property Disposal including by way of gift • whether for consideration or not • on the loss, destruction or extinction of property Destruction • unless compensation is received and is used to re-instate the property within one year • on the abandonment, surrender, cancellation, Forfeiture forfeiture or expiration of substantially all rights to property
When Does a Transfer Arise? Cont’d 11 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
When Does a Transfer Arise? Cont’d 12 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
Transfer Value - Arm’s Length Transfers 13
Transfer Value - Non- Arm’s Length Transfers 14 Bargain not at arm’s length Non- arm’s Consideration length cannot be Gifts transfers valued Related party transaction
Market Value 15 Non- arm’s length transaction Transfer value Adjusted cost market value of property at the lower of: time of transfer. market value of consideration property at the amount used in time of computing acquisition stamp duty
Adjusted Cost 16 Historical Costs Incidental Costs Adjusted Cost Cost of Improvement Cost of defending right over property
Incidental Costs 17 just and reasonable transfer costs as costs determined by (including Commissioner stamp duty) professional fees including legal, valuation & advertising INCIDENTAL COSTS
Exemptions 18 where income is chargeable to other taxes EXEMPTIONS 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
Due Date 19 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 ?
Some Future Changes… 20 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 20,000 Eldoret Town 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
Some Future Changes… 22 Taper Relief 2. 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 Percentage of gain chargeable qualifying period 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 20,000 Eldoret Town 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
The ALN Network BOTSWANA BURUNDI ETHIOPIA KENYA MALAWI MAURITIUS NIGERIA RWANDA SUDAN TANZANIA UGANDA ZAMBIA NAIROBI MOMBASA KENNETH NJUGUNA, Principal Associate Anjarwalla & Khanna Anjarwalla & Khanna T +254 (0) 703 032 312 F +254 (0) 20 364 0201 The Oval, 3 rd Floor SKA House, Dedan Kimathi Avenue E kkn@africalegalnetwork.com PO Box 83156 – 80100, Mombasa, Kenya Junction of Ring Road Parklands and Jalaram road T +254 41 2225090/6 PO Box 200-00606, Sarit Centre, Nairobi, Kenya F +254 41 2224996 T +254 (0) 20 364 0000, + 254 (0) 703 032 000 E mba@africalegalnetwork.com F +254 (0) 20 364 0201 E nbi@africalegalnet.com Legal Notice: these materials are for training purposes only and do not constitute legal or other professional advice.
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