Tax revenue on land, house sales records first growth on property deals rebound
Taxes from financial transactions on the sale of land, houses, and shares in privately held firms have grown for the first time since the rate was tripled. PHOTO | SHUTTERSTOCK
Taxes from financial transactions on the sale of land, houses, and shares in privately held firms have grown for the first time since the rate was tripled, the latest official data shows, pointing to a rebound in property deals.
The Treasury data indicate collections from transactions in real estate and shares in private companies amounted to Sh5.05 billion in the first quarter of the current financial year, a 36.30 percent jump over a similar period last year.
The receipts for the three months through September were also a 41.81 percent climb over Sh3.56 billion in the preceding quarter. This marked the first year-on-year growth since the Kenya Revenue Authority raised the capital gains tax (CGT) rate three-fold to 15 percent in the quarter starting January 2023 following the passage of the Finance Act, 2022.
Companies and households are charged a 15 percent tax on net proceeds from the disposal of land, buildings, and unquoted securities such as shares in privately held companies.
Buyers of real estate, on the other hand, pay stamp duty at the rate of four percent of the value of property in major towns and two percent in rural areas.
The rate for the purchase of shares in private firms is one percent. Defaulters of the CGT are fined a 20 percent penalty of the tax due.
The CGT was tripled despite property developers and tax experts warning it will slow down investment in the two sectors, which have struggled to shrug off the lingering impact of Covid-19 on earnings three years later.
The real estate sector has endured a sustained downturn in recent years with developers struggling to find property buyers and repay loans, resulting in bankers hiring auctioneers to forcibly sell houses to recover accrued debts.
The increased CGT collections coincide with a market survey report that showed prices of land in Nairobi’s upmarket suburbs showed glimmers of recovery from the lingering effect of the Covid-19 pandemic.
Findings by realtor HassConsult suggested average land prices for mid-to-high-end estates of Nairobi rose 0.83 percent in the quarter that ended September, a rate last seen in the pre-pandemic era.
“Following the enforcement of the [CGT] tax, property developers increased prices to protect profit margins, but some had to absorb the losses where it was a buyer’s market [supply exceeding demand],” Sakina Hassanali, head of development consulting and research at HassConsult, told the Business Daily in a recent interview.
“Generally, what we also saw is that people were mostly trying to increase prices to take care of the capital gains tax. But in cases where they were very desperate to sell, they would take a loss.”
Tax experts, business associations and professional bodies had also unsuccessfully called for the introduction of inflation adjustment—technically known as indexation—on the buying price of the property when calculating the CGT.
Consultancy and audit firm, Deloitte, had, for instance, argued that with increased CGT, the Treasury would have introduced “the concept of indexation to ensure that the effects of inflation are factored in determining the taxable capital gains”.
“The significant increase in CGT rate could also slow down investment and transactions in certain sectors such as real estate,” analysts at Deloitte wrote in an analysis last year.
The debate for inflation adjustment on CGT was rife when the country re-enforced the CGT tax in January 2015 after a 30-year suspension, but was shot down on the ground that it would “complicate the process” of calculating the rate.
Ultimately, the country settled on a modest five percent rate on net proceeds from the sale of property like land and buildings, which was seen as simple and low enough to take care of inflationary changes over the years.
