Alexander Forbes actuary Adil Suleman (left) with PKF tax consultant Nahashon Mathenge during a briefing by the Association of Retirement Benefits Schemes on the capital gains tax at The Panafric Hotel Oct 14, 2014. PHOTO | DIANA NGILA
What you need to know:
Under the new law set to take effect from January 1, inherited property will be regarded as gifts and subjected to the tax put at five per cent of the difference between selling and buying prices.
The imposition of capital gains tax (CGT) on property transactions is set to hit poor and small landholders transferring inherited property hard, experts said.
Under the new law set to take effect from January 1, inherited property will be regarded as gifts and subjected to the tax put at five per cent of the difference between selling and buying prices.
Tax experts, however, said there were several issues that need to be clarified such as what would constitute market value in places where hardly any financial transactions take place except through inheritance.
Nahashon Mathenge, a consultant with PKF Taxation Services, said costs involved in transferring land including stamp duty, legal fees and other professional fees have not been fully catered for in the law.
Such costs are supposed to be subtracted from the value of the property before determining the CGT.
“It is unclear how you arrive at the market value of the land as you have to adjust for costs. We also need further clarification as to what adjustment costs are involved. There are a number of other costs involved in transacting in land,” said Mr Mathenge.
A major factor not taken into account in the current law is that of inflation, which eats into the value of a property between the time of buying and that of selling, said Mr Mathenge.
Although the initial understanding was that land brokers would be targeted by the CGT law, experts said the intermediaries were supposed to pay income tax as theirs was a regular business.
“The property dealers have been subject to income tax all along. They cannot be subjected to the CGT because that will amount to double taxation,” said Adil Suleman, head of actuarial services at Alexander Forbes in Nairobi.
He said the land dealers may however pay CGT and then go ahead and ask for a refund of the five per cent paid.
“If the inherited land or property is not subjected to the CGT, it could be used as a major loophole by tax evaders,” said Mr Suleman.
David Nyakundi, secretary to the board of directors of the Retirement Benefits Authority, said the appreciation of pension contributions would not be subjected to tax as the scheme involved was registered.
“The unregistered schemes have to pay the CGT if they transact in property, but if they are registered then there is no such payment. However, the unregistered schemes are only about one per cent of the total number of schemes,” said Mr Nyakundi.
Earnings on bank fixed deposits, shares, bonds and real estate are all taxable save for the exempt persons. Gains below Sh30,000 will be exempted from CGT.
The CGT is being revived after being suspended since 1985.
Mr Mathenge criticised the law for not being progressive enough as it treated both the rich and poor sellers in the same manner.
“This law could have made a lot of sense if it taxed the rich people selling properties worth millions of shilling at a higher rate than the poor selling only properties of little value. In the UK, the rich pay a higher rate than the poor people,” said Mr Mathenge.
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