Affordable housing: Taxman giveth and taketh away benefit

Affordable housing constitutes one of the Big Four agenda items for the current government. Kenyans enjoyment of their constitutional right to adequate housing has proven to be a challenge.

According to Treasury secretary Henry Rotich’s 2018 Budget Statement, Kenya faces an annual shortage of about 200,000 housing units, which is expected to rise to 300,000 units by 2020 on current policies.

In response to the dire housing gap, the government has unveiled an ambitious plan to deliver 500,000 housing units by 2022.

Undoubtedly, tax rules are a powerful tool to drive government objectives by incentivising certain investments by taxpayers.

However, has this tool been utilised to its maximum advantage when it comes to encouraging the construction and purchase of affordable housing units?

Housing scheme incentives

As from September 1, first-time home buyers will now be exempted from stamp duty, equivalent to between two to four per cent of the value of the property under an affordable housing scheme.

From July onwards, there is also an affordable housing relief of 15 per cent of gross emoluments up to Sh108,000 per annum, which is linked to the scheme. Although the value of the relief may appear nominal, especially in light of current home prices, it reduces the tax payable — that is, it is a deduction from the tax itself and not just from income. All the same, there is a need to provide guidance on what constitutes an affordable housing scheme since these incentives are pegged on such schemes.

Previously, Kenyans used to save up towards the purchase of a home through the Home Ownership Savings Plan (HOSP). Depositors investing in registered HOSP schemes used to enjoy a tax deduction for their contributions to the scheme of up to Sh48,000 per annum.

The newly enacted Tax Amendment Act 2018 has doubled the limit to Sh96,000 per annum, which is a clear indicator of government support for the homeownership agenda. The challenge is that even with the doubling of the deduction, this pales in comparison to the industry estimates which suggest that there has been a fivefold increase in house prices since 2000.

Other benefits

Interestingly, some of the tax incentives around housing are linked to the occupation of that property.

For example, interest on mortgage repayments is exempted from tax up to Sh300,000 per annum provided that the taxpayer occupies the property.

Despite this threshold, mortgages are still out of reach for most Kenyans.

The 2017 Central Bank of Kenya residential mortgages market survey shows there were only 26,187 loans as of December 31 last year while the average mortgage loan size was Sh10.9 million due to increased property prices.

With a majority of Kenyans earning relatively low incomes, access to mortgages remains a challenge. The mortgage interest deduction cap is too low given the high cost of servicing the loan in Kenya. There may be a need to review the deductible amount.

Capital gains tax is not levied in the instance of a transfer of a residence the transferor occupies for at least three years before the sale. However, all is not lost for those who prefer to rent out their property instead of occupying it — they qualify for the lower residential rental tax of 10 per cent of gross rental proceeds, provided that the value of the rent they receive does not exceed Sh10 million per annum.

To spur private sector investment in affordable housing developments, the government has reduced the corporate tax rate to 15 per cent for developers who construct at least 100 low-cost residential units per year.

In addition, the VAT Act now exempts taxable supplies used exclusively in the construction of a minimum of 5,000 housing units, by a licensed Special Economic Zones operator, developer or enterprise upon recommendation by the Housing minister.

Counter to the tax incentives described above, the government is raising taxes to fund the affordable housing agenda.

The Finance Bill 2018 proposes to amend the Employment Act, 2007 to introduce a National Housing Development Fund with contributions drawn from the employer and the employee.

They will each contribute to the fund 0.5 per cent of the employee’s gross monthly earnings up to a maximum of Sh5,000. The change is expected to be effective as from October 1.

If approved, this levy is likely to increase the cost of labour, contradicting the government’s aim to reduce unemployment. It is also not clear how the levy will benefit the contributors.

Overall, the tax incentives are welcome but the prohibitive pricing in the housing market may diminish their impact.

Dealing with the corruption that has caused some of the inflation in the housing market should perhaps be more of a focus area.

Ms Muigai is an associate director PwC and Mr Osore is a consultant on employment and expatriate taxes at PwC.