A trust may be defined as a legal relationship that is established between a Settlor (the creator of the trust), the Trustee(s) (the protector/executor of the trust) and the Beneficiary of the trust.
The parties to a trust may be individuals or legal entities. Under the trust, the settlor transfers legal ownership of assets to the Trust and gives powers to the trustees to handle the assets in accordance with the authority granted under the trust for the benefit of the beneficiary.
Some types of trusts include family trusts, charitable trusts, non-charitable purpose trusts, among others.
The Legal Framework on Trusts in Kenya
The law on trusts in Kenya is provided for under the Trustee Act, the Trustees (Perpetual Succession) Act and the principles of common law.
The operations of trusts in Kenya are subject to the provisions of the Income Tax Act and the Tax Procedures Act.
The Process of Registration of a Trust
A trust is created through a written document called a declaration of trust or a settlement of trust.
Upon preparing the Trust Deed, the settlor and trustees execute it accordingly and proceed to registration at the Lands Registry under the Registration of Documents Act (Cap. 285) (“the RDA”).
Registration under the RDA establishes an unincorporated trust which does not have a distinct legal personality of its own. As such, its assets are not protected from creditors and does not have limited liability. As an unincorporated trust, it can own property, enter into contracts and do business in the name of its trustees. It does not have a separate legal existence of its own separate from its trustees.
The trust is required to be registered under the Trustees (Perpetual Succession) Act (“the TPSA”) for it to be able to hold immovable property, perform contracts in its name and becomes a separate legal entity.
The TPSA governs the incorporation of trusts and provides a defined structure on the operations of trusts and the duties of the settlor and the trustees and the extend of mandate for all the parties.
Section 3 of the TPSA provides that upon application, the registrar shall issue a certificate of incorporation of the trust. Where the application for incorporation is rejected, the registrar shall issue written reasons for the rejection.
Upon incorporation, the trust shall apply for issuance of a KRA PIN for ease of making returns for the activities it is involved in.
Taxes Payable by Trusts
Being an incorporated body, a trust is required to pay taxes payable in transactions it is involved in. For instance, incorporated trusts are required to file annual returns, stamp duty and capital gains tax for relevant transactions. However, it is important to note that family trusts are exempt from payment of capital gains tax under section 3D of the TPSA.
Capital Gains Tax (“CGT”) is a tax levied on the gain accrued to an individual or company or trust upon the transfer of property in Kenya. The rate is 15% of the net gain, calculated as the difference between the sale price and the adjusted cost of the property, i.e., cost of acquisition and developments made on the property.
The Income Tax Act (Cap. 470) governs the application of CGT in Kenya. It defines taxable income to include gains from property transfers within Kenya. According to Section 3(2)(f) of the Income Tax Act, CGT is applied to gains from property transfers. Section 34(1)(j) of the Income Tax Act specifies the CGT rate as 15%.
The First Schedule to the Income Tax Act provides for income that is exempt from tax. Under its Part I 36(g) income derived from property, including investment shares, which are transferred or sold for the purpose of transferring the title or the proceeds into a registered family trust is exempt from payment of tax including CGT.
This article provides a general discussion of the law as it stands at the moment and is not intended to be legal advice. For more detailed insights and professional advice, reach out to B M Musau & Co., Advocates LLP. Our team of experts is here to support your business needs and ensure you stay ahead in a dynamic economic environment.
I am a Kenyan Advocate and the Managing Partner of B M Musau & Co., Advocates, a position I have held since 1999. My work encompasses regulatory reforms, reduction of administrative burdens, the structure of business entities, joint ventures, acquisitions, banking, foreign investment and other general corporate areas
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