There are different types of Real Estate Taxes charged in respect to ownership or disposition of Property. Below are some of the Taxes charged, both by the National and County Government relating to Property:
LAND RATES
This is a tax imposed by county governments within a municipality or township. Rates are payable in respect of services such as water, sanitation and sewerage services provided by the county. The imposition of rates is provided under the Rating Act while the Valuation for Rating Act empowers the county governments to value land to determine the rates.
LAND RENT
Land Rent is charged by the Ministry of Lands for Leasehold Titles. The Land Rent is usually stated on the Certificate of Title and is usually revisable. Most Land Rents are revised during the renewal and extension of leases.
STAMP DUTY
Stamp Duty is tax paid during the sale and purchase of a property. The Stamp Duty is based on the sale price of the property. In urban areas, Stamp duty is 4%, while in Rural areas the Stamp duty is 2%.
One can apply for Exemptions of Stamp duty when;
- Transfer to held by family to a limited liability company wholly held by members of the same family.
- Transferring between associated companies.
- Transfer between spouses.
- Transfer in favour of any Body established for Charitable Purposes.
CAPITAL GAINS TAX
Capital Gains Tax was reintroduced in Kenya through the Finance Act 2014 as an amendment to the 8th Schedule of the Income Tax Act Cap 470. Capital gains tax is applicable on sale of immovable property or on transfer of shares for companies that are not listed in the Stocks Exchange.
Effective 1st January 2023, the Finance Act, 2022 amended the Income Tax Act increasing the Capital Gains Tax rate to 15% from 5%. The Act provides for a 15% tax on net gains upon transfer of property (shares, land, buildings) situated in Kenya.
The Income Tax Act however exempts the following transactions from Capital Gains Tax;
- Shares in the stock or funds of the government, the High Commission or the Authority established under the Organization or the Community.
- Shares of a local authority.
- A private residence if the individual owner has occupied the residence continuously for the 3 year period immediately prior to the transfer concerned;
- Property (being land) transferred by an individual where the transfer value is not more than Kshs. 3 Million.
- Transfer of agricultural property having an area of less than 50 acres where the property is situated outside a municipality, Gazette Township or an area that is declared by the Minister, by notice in the Gazette, to be an urban area for the purposes of this Act.
- Land which has been adjudicated under the Land Consolidation Act or the Land Adjudication Act when the title to that land has been registered under the Registered Land Act and transferred for the first time.
- Transfer of property under internal restructuring within a group which does not involve transfer of property to a third party (intra group transfers).
- Property (including investment shares) which is transferred or sold for the purpose of administering the estate of a deceased person where the transfer or sale is completed within two years of death of the deceased or within such extended time as the Commissioner may allow in writing.
VAT ON COMMERCIAL PREMISES
The Value Added Tax Act of Kenya, No. 35 of 2013 (the VAT Act) at Paragraph 8 of Part II of the First Schedule provides that VAT is chargeable at a rate of 16% on rent payable on sale, letting, renting, hiring or leasing of non-residential buildings or premises.
According to the provisions under the Act, the building owner is required to register for VAT if he meets the threshold set out in the VAT Act and charge VAT on any sale or rental payable and remit it to KRA on or before 20th of every month.
The High Court of Kenya in David Mwangi Ndegwa Vs. Kenya Revenue Authority (Civil Suit No. 541 of 2015) sought to clarify the interpretation of paragraph 8 of Part II of the First Schedule to the VAT Act. The suit had been filed by David Mwangi Ndegwa (the plaintiff) against the Kenya Revenue Authority (KRA) alleging that the KRA had collected VAT in contravention of the VAT Act.
The essence of the suit was that paragraph 8 of Part II of the First Schedule to the VAT Act exempts the supply by way of sale, renting, leasing, hiring, letting of land or residential premises from VAT and that the exemption ought to apply to commercial premises as well. However, the renting and leasing of commercial premises has, since 1 January 2008, been chargeable to VAT at the rate of sixteen percent (16%) whilst the sale of commercial premises has been chargeable at the same rate since the enactment of the VAT Act. The High Court, while recognizing the ambiguity of paragraph 8 of Part II of the First Schedule of the VAT Act and the lack of a definition of “land” under the VAT Act, agreed with the Plaintiff’s arguments that the constitutional definition of “land” included all land both with commercial and residential premises. Essentially, the High Court made a ruling that the sale, renting, leasing and letting of commercial premises was exempt from VAT.
KRA, vide a notice of motion dated 16 January 2019, applied to the High Court for a stay of execution of the above decision pending the hearing and determination of its appeal in the Court of Appeal. Therefore, the application of the Tax continues to be applicable until such time as the matter has been determined by the Court of Appeal.
MONTHLY RENTAL INCOME TAX
Section 6A of the Income Tax (Cap 470) Laws of Kenya provides for simplified tax regime on rental income. This is tax payable by resident persons (individual or company) on rental income earned for the use or occupation of a residential property where the rent income is between Kshs. 288,000 (Kshs. 24,000 per month) and Kshs. 15 million per annum.
Residential rental income is charged at a flat rate of 10% on gross rent received per month. It is payable when landlords receive rent from their tenants either monthly, quarterly, semi-annually or annually. However, returns must be filed monthly. No expenses, losses or capital deduction allowances shall be allowed for deduction from the gross rent.
For any month that the landlord does not receive any rent he/she shall file a NIL return.
The exemptions from Residential Rental Income Tax include:
- All persons earning less than Kshs.12,000 per month or Kshs.144,000 p.a. (lower limit) or earning higher than Kshs.10m per year (higher limit) are not eligible to pay the MRI.
- Rental income from a commercial property is also exempted from MRI.
- Non-resident landlords
- Upon writing to the commissioner giving grounds opting out of the simplified regime.
It is important to carefully consider all Tax implications associated with buying and selling Properties.
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