Stamp Duty and Capital Gains Tax
Stamp duty payment is governed by the stamp duty Act Cap 480 of the Laws of Kenya (the “Act”). It is an act of Parliament that makes provision for the levying and administration of stamp duties.
Section 5 of the Act provides for liability to stamp duty. The section provides that every instrument specified in the Schedule to the Act is chargeable to duty and when it relates to any property or anything done or to be done in Kenya.
Under Section 6 of the Act documents executed in Kenya and which require stamping must be stamped within 30 days of execution or within 30 days of receipt of a document in Kenya for documents executed outside Kenya.
Section 19 of the Act discusses on non-admissibility of unstamped instruments and states that a document which requires to be stamped but which is not stamped cannot be produced in evidence in court in civil proceedings.
Under Section 46 of the Land Registration Act states that an instrument required by law to be stamped shall not be accepted for registration unless it is stamped in accordance with the Stamp Duty Act.
Stamping Out of Time
Section 20 of the Act states that the collector has the authority to allow stamping of an instrument where he is satisfied that the omission or neglect to stamp did not arise from any intention to evade payment of Stamp Duty or to defraud, and the circumstances of the case justify leave being granted to stamp out of time.
Where such leave is granted, the instrument is stamped on payment of the unpaid stamp duty and of a penalty unless the Collector waives the penalty on being satisfied that the circumstances warrant such waiver.
Refund of Stamp Duty
25 of the Act gives the Collector power to refund Stamp Duty if he is satisfied that an instrument has been erroneously assessed with duty or penalty.
The application for a refund must be made within 1 year after the date of payment of that duty.
Instruments Chargeable to Stamp Duty
The instruments that are required to be stamped include:
4. Discharge of Charge;
5. Movable Assets;
6. Insurance Policy;
7. Debentures and
8. Memorandum and Articles of Association.
The amount of Stamp Duty depends on the transaction in question, that is, whether it is a transfer, lease, charge, etc. Assessment of Stamp Duty is based on the consideration stated in the instrument.
Section 10 of the Act states that any factor or circumstance affecting the stamp duty must be stated in the instrument. The instrument must the value of the subject matter.
In a transfer the sale price is the consideration, consideration in a charge will be the principal amount, under a Lease the rent is the consideration and therefore any matter affecting the stamp duty must be stated and consideration is one of those matters.
Failure to declare the correct amount for stamp duty is an offence.
Stamp Duty Payable on Various Instruments:
- Transfers are divided into two categories:
- Urban Land – land in the municipalities – rate of stamp duty is 4%.
- Agricultural land Outside the Municipality. – the rate of stamp duty is 2%.
Under section 10A of the Stamp Duty Act states that the Collector of Stamp Duties shall refer to the Chief Government Valuer any transfer on sale of any immovable property before registration of the relevant instruments in order to determine the true open market value of such property for purposes of ascertaining whether any additional stamp duty is payable. Stamp duty shall be payable on the declared value of the Property by the Government Valuer.
- Leases pegged on annual rent or averaged annual rent
- 1% for 3 years or less
- 2% for more than 3 years
- Charge- A charge is created where a Chargor creates security over land in favour of a lender. The stamp duty rate is 0.1% based on the amount secured. For a further charge and a second charge the stamp duty rate is also 0.1%. The difference between a further charge and a second charge, further charge is an additional facility provided by the same lender whereas a second charge a different Lender provides a facility but charges the same property.
- Discharge of Charge the stamp duty rate is 0.05% based on the amount that had been secured by the Charge.
- Movable Assets- means any tangible asset i.e. all types of goods including motor vehicle, crops or intangible assets e.g. deposit accounts, intellectual property rights. Every transaction that secures payment or performance of an obligation where the collateral is a movable asset is governed by the Movable Property Security Rights Act, 2017.Section 117 of the Stamp Duty Act provides that an instrument under Movable Property Security Rights Act, 2017 shall be exempt from stamp duty.
- Debenture – it is a document given by a company as evidence of a debt to the holder usually arising out of a loan and mostly secured by a charge. Assessment of a debenture to determine the stamp duty payable is done at the companies registry. The stamp duty rate is 0.1% of the assessed amount.
- Nominal duty is payable only on prescribed documents such as power of attorney, trust deeds, sale agreements, supplemental securities, partial discharges.Previously, Section 31 of the Stamp Duty Act discussed on stamping of the hire purchase agreement. However, this section is no longer applicable as it was deleted by the Movable Property Security Rights Act, 2017.
Capital Gains Tax
Capital Gains Tax (CGT) is a tax chargeable on the whole of a gain which accrues to a company or an individual on or after 1st January, 2015 on the transfer of property situated in Kenya, whether or not the property was acquired before 1st January, 2015.
It is not a new tax. It was suspended in 1985 and has now been re-introduced effective 1st January, 2015.
The rate of tax is 5% of the net gain. It is a final tax and cannot be offset against other income taxes.
Property is defined in the law (Eighth Schedule to the Income Tax Act). It includes land, buildings and securities.
Marketable securities are defined to include a security capable of being sold and stock as defined in Section 2 of the Stamp Duty Act. However, transfer of securities traded on any securities exchange licensed by the Capital Markets Authority is not chargeable to tax.
The tax is to be paid by the person (resident or non-resident) transferring the property, that is, the transferor. The transferor can either be an individual or a corporate body.
A transfer takes place: –
- a) where a property is sold, exchanged, conveyed or disposed of in any manner (including by way of gift); or
- b) on the occasion of loss, destruction or extinction of property whether or not compensation is received; or
c) on the abandonment, surrender, cancellation or forfeiture of, or the expiration of rights to property.
Calculation of The Net Gain
The net gain is the excess of the transfer value over the adjusted cost of the property that has been transferred. It is this excess that is subjected to tax at 5%.
The Transfer value of the property is the amount or value of consideration or compensation for transfer of the property less incidental costs on such transfer.
The Adjusted cost is the sum of the cost of acquisition or construction of the property; expenditure for enhancement of value and/or preservation of the property; cost of defending title or right over property, if any; and the incidental costs of acquiring the property.
The adjusted cost shall be reduced by any amounts that have been previously allowed as deductions under Section 15(2) of the Income Tax Act.
The transferor has the responsibility of proving the cost of acquisition of the property and should therefore provide this information.
However, in instances where this information is not available, then the amount of the consideration for the acquisition of the property shall be deemed to be equal to the market value of the property at the time of the acquisition or to the amount of consideration used in computing stamp duty payable on the transfer by which the property was acquired, whichever is the lesser as per Paragraph 9 of the Eighth Schedule.
Declaration of Tax
The taxpayer does a self-assessment to determine the gain upon which tax is computed.
The computations are subject to Commissioner’s confirmation of correct gain as the basis of tax computation.
The transferor shall complete the relevant declaration form (CGT form), upon transfer of any property, compute the gain and pay the tax thereon accordingly. Form CGT 1 will be used upon transfer of land and buildings; Form CGT 2 will be used in the case of marketable securities while Form CGT 3 will be used to declare exempted/excluded transactions.
What Happens When a Loss is Made?
Capital losses are deductible against Capital gains in the year of income the losses are made and if not exhausted may be carried forward and deducted from capital gains in subsequent years of income – Section 15(3)(f) of the Income Tax Act.
The 10 year limitation for carrying forward of losses is applicable. A taxpayer may apply for extension of the period for carrying forward of losses upon expiry of the 10 years.
The application will be considered by the Commissioner and a recommendation made to the Cabinet Secretary.