Kenyan MPs double tax on sale of property and securities
Investors in Kenya are eyeing lower returns from the sale of property, private shares and marketable securities after the Parliamentary Finance and Planning Committee approved a proposal for double taxation on the sale of related assets.
Capital gains tax (CGT) levied on the sale of property or shares by private owners will rise to 10% from January next year, which analysts say could reduce the frequency of such transactions or discourage them altogether.
Adding to Kenya’s already challenging capital markets environment – which has suffered massive outflows of foreign capital, a declining benchmark and stubborn investor apathy – the net tax could be an additional burden.
Previous attempts to increase the CGT in 2018 and 2019 failed, but growing pressure to increase tax revenue and reduce the budget deficit has given scope for this reform.
The parliamentary committee rejected a proposal by manufacturers and experts to allow an inflation adjustment to be introduced into the calculation of CGT – technically known as indexation. Now there are fears that will expose investors to higher tax rates on the cost of assets.
Eric Musau, head of research at the Nairobi-based Standard Investment Bank, said East Africa that the higher tax rate is likely to affect both real estate investors and capital market investors, encouraging other forms of investment such as new real estate investment trusts (REITs).
“Indexation will mitigate the impact of the capital gains tax increase for direct owners of property,” Musau said. East Africa.
He said institutional investors are increasingly likely to consider REITs in the coming years.
“A higher capital gains tax will not affect a property held directly in the same way as property through a REIT. A REIT provides a much more tax efficient mechanism as no capital gains tax (among other taxes) is applicable,” he added.
According to a report by audit and tax advisory firm Deloitte, although Kenya’s CGT rate was the lowest in the region, it does not provide for inflation adjustments.
“One would have hoped that with the proposed increase in the CGT rate, the government would also have introduced the concept of indexation to ensure that the effects of inflation are taken into account in the determination of capital gains taxable,” reads the report that analyzed Kenya Finance. Bill 2022.
Uganda’s capital gains tax is 30%, but is adjusted for inflation based on the original cost or market value of the asset as of March 31, 1998.