Introduction
Capital Gains Tax (CGT) is a critical consideration when transferring ownership of assets such as property, stocks, or investments. In Kenya, CGT is levied at 15% on the profit (capital gain) earned from the transfer of an asset. This rate increased from 5% on 1st January 2023. Many taxpayers find themselves in disputes with the Kenya Revenue Authority (KRA) due to unclear documentation or misunderstandings about when a sale is deemed to have taken place.
Key Concepts in Capital Gains Tax
- Capital Gain vs. Transfer Value
- Capital Gain: The profit realized when the transfer value (sale price) of an asset exceeds its adjusted cost (acquisition cost plus allowable expenses).
- Transfer Value: The consideration received for the asset upon disposal.
- Adjusted Cost: The original purchase price plus any additional costs incurred to acquire, improve, or sell the asset (e.g., legal fees, valuation costs).
- CGT Rate in Kenya
- Fixed at 15% of the net gain, as per the Eighth Schedule of the Income Tax Act.
- Determining Gain or Loss
- Gain: Transfer Value > Adjusted Cost → Taxable at 15%.
- Loss: Adjusted Cost > Transfer Value → No CGT liability.
- Computation of CGT in Kenya
Capital Gains Tax= 15%*(Transfer Value – Adjusted Cost)
Case Study: Commissioner of Domestic Taxes v Fine Spinners Limited (Income Tax Appeal E734 of 2024)
Case Background
- In December 2022, Fine Spinners Limited sold a property and paid 5% CGT based on the prevailing law at the time.
- Payment was received in USD, and stamp duty was paid in July 2023.
- Fine Spinners Limited used the December 2022 exchange rate and submitted CGT payment before the new 15% rate became effective.
Fine Spinners Limited Argument
- Fine Spinners argued that the sale occurred in December 2022, when the agreement was signed and full payment was made.
- Fine Spinners mentioned that since the transaction was concluded before 1st January 2023, the 5% CGT rate should apply.
- Fine Spinners averred that the foreign exchange rate used was correct as of the actual sale date.
KRA’s Argument
- KRA argued that property transfer is only recognized for CGT purposes once the registration is complete.
- KRA observed that registration happened in July 2023, the applicable CGT rate is 15%, and the exchange rate should be as of that date.
- KRA averred that Fine Spinners failed to provide a signed and registered transfer deed to support an earlier transfer date.
Tribunal’s Decision
The Tax Appeals Tribunal ruled in KRA’s favor, concluding that:
- The legal “transfer” occurs upon registration (as per Paragraph 6(1)(a) of the Eighth Schedule to the Income Tax Act).
- CGT is therefore triggered at the time of registration, not payment or signing of agreements.
- The 15% rate effective from 1st January 2023 applies.
- The exchange rate for CGT purposes must reflect the value at the actual date of transfer, i.e., post-July 2023.
Conclusion
- CGT is based on the actual date of transfer — which is legally deemed to be when registration occurs.
- The 15% rate applies if registration occurred on or after 1st January 2023.
- The exchange rate used should match the rate at the date of registration, not payment.
Recommendation
- Taxpayers should retain all transaction documents including stamped and registered transfer deeds, valuation reports, sale agreements, payment confirmations, and foreign exchange rate evidence — as proof of the transfer date.
- Taxpayers should align transactions attracting relevant taxes to particular calendar dates when new tax laws take effect.
- Reach out to us on info@intelpointconsulting.com for any tax issues you may be having.