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Columnists

Tax on housing savings big blow to homes dream

Apartments under construction
Apartments under construction. FILE PHOTO | NMG 

On June 30, President Uhuru Kenyatta assented to the Finance Act 2020. The Act introduces policy and taxation measures for revenue generation that will enable the government to raise its projected revenue of Sh1.89 trillion for the financial year 2020-21.

In the wake of the Covid-19 pandemic, Treasury Cabinet secretary Ukur Yattani has faced a tough balancing act between revenue generation and incentives to revive the ailing economy in the wake of the adverse effects of the pandemic.

Among other changes, the Act seeks to remove the tax benefit on House Ownership Savings Plan (HOSP). The changes include contributions to a registered HOSP will no longer be tax-deductible, where the maximum limit was Sh8,000 per month or Sh96,000 per annum and the interest by depositors and income of a registered HOSP, which were previously tax-exempt will now be subjected to income tax.

A HOSP is a plan that was conceived as a 10-year savings scheme to aid people who want to acquire a home or save to build deposits to qualify for a mortgage. In its 20 plus years of existence, the scheme has mainly been centred on banks, insurers and building societies.

The passing of the Finance Act 2019 in December expanded the scope of institutions authorised to hold HOSP savings to include fund managers and investment banks registered under the Capital markets Act. This was a revolutionary move because these institutions have access to long term financial instruments that can match the ten - year maximum saving period.

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Fund managers have products like collective investment schemes — unit trusts, which target lower-income investors

Therefore, Kenyans can save for housing using a HOSP that invests through a money market fund. The returns for these funds are up to 10 per cent per annum. The compounding aspect ensures that the contributors are still earning extra income during their saving period. The fact that fund managers use pooled funds to manage investor funds makes the creation of capital markets-based HOSP an essential enabler of access to affordable housing.

Capital markets have greater exposure to low-income investors, the originally intended beneficiaries of the HOSP. The products are usually distributed through agents who can “shout” about the benefits of using HOSP to finance the purchase of a home. The recently issued guidance to collective investment schemes, by Capital markets Authority (CMA), on investment performance measurement and reporting enhances the security of the funds.

The incentivised support on construction of affordable houses only addresses the supply side of this agenda. What about the demand side? How will the low-income Kenyans afford to pay for the houses? Recent Housing ministry publications indicate that 83 per cent of the existing housing supply is for the high-income and upper-middle-income segments, with only 15 per cent for the lower-middle and two per cent for the low-income population.

The Treasury and the CMA should provide measures that ensure that Kenyans are familiar with the benefits that come with such savings plans. Give the capital market players a chance to create and publicise HOSP products.

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