What is 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 marketable security situated in Kenya, whether or not the marketable security 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.
What is the rate of tax?
The rate of tax is 5% of the net gain. It is a final tax and cannot be offset against other income taxes.
Who is liable to pay the tax?
The tax is to be paid by the person (resident or non-resident) transferring the marketable security, that is, the transferor. The transferor can either be an individual or a corporate body. For investment shares, while the tax incidence is on the transferor, the responsibility to collect and account for the tax will be on the stockbrokers and / or agents. (Paragraph 18 of the Eighth Schedule) For transfer of discountable securities like Commercial Paper and Treasury Bills, CGT will be collected and accounted for by the Central Bank of Kenya.
What constitutes a transfer?
A transfer takes place:
- Where a marketable security is sold, exchanged, conveyed or disposed of in any manner (including by way of gift); or
- On the occasion of loss, destruction or extinction of marketable security whether or not compensation is received; or
On the abandonment, surrender, cancellation or forfeiture of, or the expiration of rights to marketable security.
How do you determine the net gain?
The net gain is the excess of the transfer value over the adjusted cost of the marketable security that has been transferred. It is this excess that is subjected to tax at 5%.
The transfer value of the marketable security is the amount or value of consideration or compensation for transfer of the marketable security less incidental costs on such transfer.
The adjusted cost is the sum of the cost of acquisition of the marketable security; expenditure from agents’ commission, if any; and the incidental costs of acquiring the security. 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 marketable security if any 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 marketable security shall be deemed to be equal to the market value of the marketable security at the time of the acquisition or to the amount of consideration used in computing stamp duty payable on the transfer when the marketable security was acquired, whichever is the lesser. For securities acquired from the year 2005, the cost of acquisition will be the actual cost. Where a pool of securities acquired at different dates and at different prices are sold, the adjusted cost will be computed on a First in – First out (FIFO) basis.
What is the due date/tax point?
It is a transaction based tax and should therefore be paid upon transfer of marketable security but not later than the 20th day of the month following that in which the transfer was made.
Where a transfer date is different from the settlement date then the transfer date will be the tax point in line with International Accounting Standards.
The Tax shall be paid through Commercial Banks into the Capital Gains Collection Account No. 1000223577 at the Central Bank of Kenya. Penalties and interest charges will apply in cases of default and in accordance with the provisions of the Income Tax Act, Cap 470. 4
Stockbrokers and other agents should ensure that CGT is withheld / collected before releasing the sale proceeds to their clients.
How is the tax to be declared?
For investment shares and marketable securities, the stockbrokers and agents have the responsibility to do the declarations for their clients in line with Paragraph 18 of the Eighth Schedule.
CGT for non residents will be assessed and charged in line with Section 47 of the Income Tax Act.
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 4 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 4 years. The application will be considered by the Commissioner and a recommendation made to the Cabinet Secretary.