Experts warn on dangers of increasing capital gains tax

Experts have warned the government of the dangers of rushing into raising capital gains tax (CTG) as doing so could send a wrong message to markets and hurt the concept of home ownership it is trying to prioritise.

They said the increase in CTG from 5 per cent to 15 per cent will also discourage investors in unquoted shares who will be hesitant to sell their property this year.

“The tax is punitive and will dampen the real estate sector and increase the number of people opting to continue renting houses,” the experts warned.

Carlos Okello, Agulo Properties CEO said the sector will witness a rise in Joint Ventures (JVs), where instead of paying money upfront for the construction of a property, preference will be in exchange for the development of units.

“The joint ventures will reduce the risk at the point of buying land by escaping the Capital Gains Tax. You do the acquisition by not paying the value of the land. At that level, you escape the 15 per cent. But since the apartments will have their own title deeds, that is when you pay the 15 per cent capital gains tax,” he explained.

Experts also say that the move could also create a liquidity gap in the market, in the short term, as investors weigh options, in a move that will also be worsened by the fact that Kenya does not have an indexation allowance, which is a tax relief due to a rise in inflation.

“The difference between the region is that there is an indexation allowance, in the short term a lot of investors are going to rethink their transaction and we will have a liquidity gap,” noted Edna Gitachu, a tax policy leader at PwC.

The capital gains tax is expected to clash with President William Ruto’s observation that the country is taxing trade more than it is taxing wealth. This means that one of the tax proposals in the new administration’s expected tax policy framework will be wealth tax. “Capital gains tax is a form of wealth tax because it happens at the time of disposal of one’s wealth, other forms of wealth tax are property rates and stamp duties,” said Edna.

Taxing profits

The taxman expects to collect Sh2.14 trillion or 15.3 per cent of the gross domestic product (GDP), up from the Sh1.8 trillion for the current financial year ending June 30, 2023. This will be through taxing profits on the sale of land and buildings.

Buying and selling property is one of the most thriving businesses in Kenya which offers tidy returns, whether one is dealing with the sale of land or buildings as long as the market is favourable.

However, Okello said tripling the tax will shake the real estate market. He said prices will increase amid a stagnant economy, a factor that will see development stagnate with property owners likely to hold longer onto their possessions.

Holding onto an asset for longer than 12 months realizes a long-term capital gain and lower tax rate. “With reduced buying power, the affordable housing space, which is enabling Kenyans own houses/ homes will also suffer,” he said.

Speaking to the Business Hub, Ken Gichinga, the lead economist at Mentoria Economics said CTG amounted to double taxation and will hurt real estate players who have been facing a slump by “prolonging their plight.” He wondered how authorities arrived at the new tax, given the wide disparity between the land rate and CTG.

“If you look at the rate, it has increased from 5 per cent to 15 per cent, while land rates are at 0.015 per cent.   Already, there is confusion. These are two very different estimates. The question is, how did they arrive at this? The philosophy on how they came to the specific number is questionable,” he said.

The economist said administering the tax will face headwinds in the short term, for the lack of a streamlined land registry.

The Government has not completed digitizing the land cadastre, with the possibility it is populated with multiple landowners.