The capital gains tax (CGT) has since January 1, 2023, been charged at 15 percent from five percent thanks to the Finance Act, 2022. It may be timely to assess the overall effect of the increased CGT that is charged on the profit made on the sale or transfer of property.
This includes the sale or transfer of land and shares. The obligation to pay CGT arises at the point a sale occurs and the duty to pay falls on the person transferring or selling the property.
To grow the economy, specifically the real estate market and capital markets, the government suspended CGT in 1985. Since then, the real estate market has significantly contributed to Kenya’s GDP.
The suspension of CGT is partly to thank for this as it encouraged both local and international investors to venture into the sector, resulting in a boom in the real estate market.
With the increase in government expenditure, CGT was reintroduced. Pursuant to the Finance Act, 2014, the government reintroduced CGT effective January 1, 2015, at the rate of five percent. The reinstatement was also aimed at widening the tax base and ensuring that Kenya aligns with neighbouring countries that were already charging the tax.
What impact has the increase in CGT had?
It was predicted that an increase in CGT would negatively affect the property market. Before its implementation, it was argued that a marked increase in CGT would ultimately cause a decline in the sale of property. So much so that industry players and analysts urged the government to lower the tax to 10 percent.
As of the first quarter of 2023, tax revenues from real estate and private share transactions amounted to Sh3.28 billion, according to revenue statistics by the Treasury. This marked a 12.92 percent decrease from Sh3.76 billion recorded in a similar period in 2022.
However, despite the increase in CGT the real estate market has continued to thrive with the continuing demand for housing, retail space and land. In the third quarter of 2023, the real estate sector grew by 6.2 percent, compared to an improvement of four percent in the third quarter of 2022, according to the Kenya National Bureau of Statistics.
If anything, CGT may not be the greatest challenge to the real estate market, if at all. The decline in tax collections from overall property transactions might be because of the increasing cost of living that has significantly constrained the disposable income of many Kenyans.
The economic strain mirrors global trends, with nations worldwide contending with uncertainties stemming from the aftermath of the Covid-19 pandemic, global conflicts, and political instabilities.
A further problem is that the law does not provide for inflation adjustment. Inflation adjustment, otherwise known as indexation, would allow sellers to adjust the cost of their property to current prices based on the present-day inflation rate.
This is necessary to ensure that investors are cushioned against the effects of the high inflation rates.
Nevertheless, the Kenyan real estate market continues to soar. It is worth noting that Kenya has a relatively lower CGT rate compared to other regional players. Uganda charges a rate of 30 percent as part of business income, Zimbabwe 20 percent while South Africa imposes 18 percent for individuals and 21.6 percent for companies.
Additionally, Kenya's status as a key economic hub and its position among the fastest-growing economies in Africa enhance investor confidence.
It is premature to conclude on the specific effects of the CGT increase on the property market at this stage. Nevertheless, it is imperative that the government and other stakeholders track revenue collections and the overall economic growth.
Amrit is a consultant in the Real Estate and Finance Practice at DLA Piper Africa, Kenya while Esabel is an associate and Dickson is a trainee lawyer in the same practice. Â
