Private property owners face value appreciation tax

Kenya’s real estate investors face a new levy as the government moves to claim its share of property value appreciation in areas that have benefited from infrastructure development.

Planning and Devolution ministry is proposing that the Rating Act and Valuation for Rating Act be reviewed by end of June to enable Kenya Revenue Authority (KRA) collect betterment taxes on land.

Betterment tax is a levy imposed on unearned profits that accrue to private property owners from property value appreciation in areas where new infrastructure has been developed.

“Legislations related to rating i.e. Rating Act and Valuation for Rating Act will be reviewed to provide for the rating of properties based on both improved and unimproved site values to allow for introduction of betterment tax,” the ministry says in the final draft of the Sessional Paper on Devolved Government.

The ministry is betting on the planned review to significantly increase rating revenues that currently stand at Sh8.6 billion or about 34 per cent of counties’ internally generated funds and 0.25 per cent of GDP.

While the Rating Act has empowered local authorities from the 1920s — and counties from 2013 — to tax both land and improvements on it such as buildings, only land has attracted such levies.

Land owners, however, face development levy equal to one per cent of the project value if they choose to put structures on the land. 

At the KRA, the structures developed on land attract four per cent stamp duty when sold or attract rental income tax if put to commercial use.

Under the proposed changes, the KRA will design and collect all the rating levies based on a valuation roll prepared by the Ministry of Land before it is shared out to counties.

Industry players have opposed the proposal, saying appreciation of property values, including those linked to infrastructure development, are already taken care of in the existing rating and valuation laws.

“A betterment tax will only amount to overtaxing and subjecting tenants to high service charge as prices for housing units rise beyond the reach of most buyers,” said the Institution of Surveyors of Kenya chairman Collins Kowuor.

Similar concerns have come from tax experts who see the whole idea as an experiment that will only add a fresh burden on the state.

READ: High price of land in Nairobi denies residents homes

John Thindi, a tax expert at PKF, said it would be difficult for the government to prove the extent to which infrastructure development has driven up property prices in a particular area.

“Property markets are generally speculative in Kenya and land prices are always on upward trend even in places with no public infrastructure,” he said, citing places like Ongata Rongai where land and house prices have continued to rise despite poor state of roads that cause heavy traffic jams for hours.

Mr Thindi instead wants the government to introduce capital gains tax, which he argues is likely to bring all investors and property owners under the tax bracket.

“For a country like Kenya which has no zoning rules, such a tax will only turn out to be discriminatory against certain groups or class of people and will thus be thrown out as unconstitutional,” he said.

People familiar with the thinking within government circles, however, say the campaigns may also see freehold land, agricultural land of not less than 12 acres, public land and most private land brought to the rating roll.

Generally, property values soar in areas where the government has developed infrastructure like railway lines, pipelines, roads, airports, bridges, dams, educational institutions and health centres.

Water and electricity supply lines as well as data cables with direct influence on property value also tend to follow the distribution pattern for public infrastructure.

For instance, construction of Sh31 billion Thika Highway has significantly raised property prices in Ruaraka, Kasarani, Githurai, Ruiru, Juja and Thika.

Before the project began in 2009, the highest an acre of land located at the prime stretch between Globe Cinema and Roysambu could fetch was Sh5 million. This has since gone up 12 times to an average of Sh60 million.