Kenya’s Capital Gains Tax Could Shutter Home Owners’ Dreams

Kenya’s Capital Gains Tax Could Shutter Home Owners’ Dreams

Home ownership is a dream for many Kenyans but this dream is going to be shuttered for the average citizen of the East African nation after the tax-man reintroduced capital gains tax, three decades after it was suspended.

Kenyan suspended capital gain tax in 1985 to encourage investments in stocks, bonds and properties.The government has reintroduced the tax after committing to the International Monetary Fund (IMF) in December 2013 in order to access more credit extensions from the international lender.

On November 17, the country’s revenue agency published notices in the dailies notifying property dealers that from January 1, 2015, proceeds from the sale of houses and land will attract a 5 percent tax charge.

“We are already drafting contracts that state that the buyer will pay any costs related to capital gains tax in future,” Abdiwahid Biriq, a partner at Biriq & Company Advocates told AFKInsider.

Tax experts and property sales agents say that this is going to dent the ability of most potential home owners.

The Kenya Revenue Authority already charges 4 percent stamp duty, add legal fees and other upfront costs and a buyer already has to part with fees that range between 6 and 7 percent of the sales price.

Add the 5 percent and buyer will pay at least 10 per cent of the sales price meaning that a buyer planning to purchase an apartment that costs $88,000 will fork out at least $7,920 in taxes.

Lawyers say that buyers will pay the tax since developers have openly said that they will not absorb any share of the capital gains tax.

Biriq said that while other countries in the region, the wider continent and developed countries such as the US, UK and have the tax, there are incentives by the government for first time buyers.

South Africa for instance has a 40 percent capital gains tax rate, while Nigeria has a 10 percent rate and the UK has rates of up to 28 per cent.

Biriq further said that the difference between Kenya and these other governments, such as Singapore and the UK, is these massive housing investments these countries have made to enable ordinary people to own a house.

Capital Gain Tax Exemptions

The UK for instance has capital gain tax exemptions. The British government  allows developers to claim between 25 to 100 per cent of costs incurred in renovating apartments or converting shops to apartments.

An example closer home shows that countries such as South Africa have capital gains tax exemptions on houses sold to buyers who will live in them and are not buying them for sale. Houses that cost up to $180,000 are also tax exempt.

Also while South Africa introduced the capital gains tax 15 years ago it lowered income tax for both individuals and companies.

Corporate finance analysts agree that the new tax will only make it harder for potential home owners. Property prices in Kenya are amongst the fastest growing which raises the home ownership hurdle every year, even without the capital gain tax.

Johnson Nderi, corporate finance manager at ABC Capital, said that the tax is punitive since local interest rates are already high.

“It is home buyers who might have to pay a premium because of the high cost of capital,” Nderi told AFKInsider.

Developers access loans at up to 20 percent meaning that their cost will increase to 25 percent from 2015.

The alternative, Nderi said, is for the government to cut down on spending and public funds wastage. “The new tax is contrary to pleas by the private sector who have lobbied the government to bring down the cost of housing to reduce the housing gap.”

According to a 2012 report buy the Central Bank of Kenya and the World Bank, the annual demand for housing in the east Africa’s largest economy was estimated at 150,000 units per annum yet the supply is only 30,000 units yearly. With this gaping deficiency most property sales go to individuals or companies who in turn rent them out as opposed to occupiers.

A home ownership report by Hass Consult, real estate advisory firm, found that 75 percent of purchasers acquire an apartment to let it out, 9 percent to occupy it while 16 percent purchase to re-sell the units for capital gains.