Expect an erratic property transfer window before the year ends and into the New Year as the new tax dispensation that ushers in a tripled capital gains tax (CGT) takes effect on January 1.
This is the verdict of property tax experts who say there could be a significant increase in the number of properties exchanging hands as dealers rush to beat the deadline of the implementation of the new CGT laws and a subsequent lull after that as transaction advisers script the best tax avoidance routes.
Nikhil Hira, a tax partner with Kody Africa LLP, says that a slowdown in conveyancing transactions, a rise in property transfer disputes with the taxman and a flood of holding companies based in tax havens will be a natural flow going forward as property dealers register new CGT while Kenya Revenue Authority (KRA) takes its position to realise ambitious revenue targets in an economy struggling to get to its feet.
“A number of property deals may be hastened to conclusion before the end of the year. On the same level, a number of property deals may be halted or slowed down as transaction advisors look for the best ways to reduce the costs of the new tax requirements on their client sellers. Tax avoidance is not illegal,” says Hira.
“Disputes will rise because KRA will require documentation proof from the time a property was purchased to the time the property is exchanging hands when one is declaring CGT. A number of individuals may not be having such documentation,” adds Hira.
The National Treasury moved to close ranks with her neighbours in the East African Community by raising CGT from 5 percent to 15 percent.
In Uganda, capital gains is capped at 30 percent while in Rwanda, capital gains is taxed at 5 percent and 30 percent on immovable commercial property and Tanzania charges 10 percent for residents and double for non-residents.
In Kenya however, CGT regulations have been a bit lenient compared to her neighbours.
CGT was suspended from 1985 to 2015 only to be introduced in 2016. The tax is only paid at the transfer of a property by the seller on adjusted profits made on the sale of the asset after deducting all capital costs including purchase price, any costs towards improving the facility, any professional transaction and any other capital expense on the property.
“Transfer of property for the purpose of securing a loan, transfer of assets between spouses, transfer by a creditor for the purpose only of returning property used as security for a debt or a loan are exempt from CGT,” says Zipporah Mwau of Mwau & Company Advocates.
Other areas where CGT is exempt include if an individual is selling their residence and can provide proof that they have been staying on the unit for at least three years.
Also exempt from CGT is transfer of a dead person’s property to the personal representative, transfer of property by the representative to the deceased’s beneficiaries in the course of administration of estate, when a company is bankrupt and an administrator takes over or in the case a company is being wound up among others.
According to Ms Mwau, one of the biggest challenges with CGT is the requirement that it be paid within 30 days of being declared to KRA. This means that the seller has to avail all the necessary documentation to ascertain what is declared as tax.
“All capital expenses relating to the property are necessary for the KRA to accept any adjustment to the profit otherwise a seller might find themselves paying tax on the gross amount received.”
The erratic property transactions ahead or after the implementation of the new tax law, experts say, is necessary so as to facilitate transactions before the new law takes effect under the current rates of 5 percent and to address the best ways to avoid the cost of the new tax.
“It is difficult but not impossible to avoid taxes on transfer of property. (Tax avoidance is not illegal),” says Eunice Nyiero, managing partner Qexle Legal Consultancy.
“The law creates instances where taxes are avoided. For example, transfers relating to Real Estate Investment Trusts (Reits), transfer of land for construction or expansion of educational institutions.”
According to Hira, transfer of properties, for example, from one relative company to another will be listed at a higher base cost after the transfer.
A base cost is the cost of an asset against which any price upon disposal is compared to determine whether a capital gain or loss has been realised.
Francis Kamau, a tax expert at EY said that tax consultants are already advising clients on what is the best course of action in the wake of the new tax disposition.
“We are looking at Rwanda and Dubai as new financial centres with more favorable tax regimes,” says Kamau.
“Kenya was a haven of transactions because we were lower on capital gains compared to our neighbouring countries. That is quickly changing.