The Types of Taxes Payable in Conveyancing Transactions in Kenya

Taxes are a primary source of revenue in Kenya’s economy and the Kenya Revenue Authority and all other bodies charged with tax collection rigorously exercise this mandate.

The taxes collected by Government through the various agencies are in turn used in development projects including roads, building hospitals, paying salaries to civil servants among other functions.

Conveyancing transactions are those that deal with acquisition of land and immovable properties, perfection of securities to obtain credit, discharging of securities upon repayment of credit advanced by banks and other credit institutions, registration and setting up of trusts and vesting immovable properties in a trust, leases and tenancies, transmissions of estate assests to beneficiaries among others.

The specific taxes that are payable in conveyancing transactions are:

 

Stamp Duty

The conveyancing instruments that attract stamp duty include, Agreements for Sale of land, Transfers, Charges, Discharges of Charge, Lease and Tenancy Agreements, among others.

For Agreements for Sale, Leases, Tenancy and Transmission instruments (LRA 39 and LRA 42), they attract nominal stamp duty of Shs.240 which is payable to the collector through M-Pesa Paybill Business No. 222222.

For substantive instruments like Transfer Forms, stamp duty is calculated based on the value of the property as assessed by the Government Valuer or a private valuer. The Stamp Duty (Valuation of Immovable Property) Regulations 2020 provide that a private valuer may conduct valuation of property to assist the land registrar ascertain Stamp Duty payable.

Properties within cities, municipalities and urban areas attract Stamp Duty at the rate of 4% of the value of the property while the rate applicable for those properties in rural areas is 2%.

The Principal Secretary, State Department for Lands and Physical Planning on 5th April 2024 issued a list of gazetted cities and municipalities for purposes of calculation of stamp duty where all those areas will henceforth attract stamp duty at a rate of 4% of the value. We attach the list at the end of this publication.

The procedure for payment of assessed Stamp Duty is through the ArdhiSasa platform under ArdhiPay where invoices are created and upon payment, receipts issued. Please click here Change of Stamp Duty Payment Channel – State Department for Lands and Physical Planning for a detailed procedure explanation.

 

Capital Gains Tax

Capital Gains Tax (“CGT”) took effect on 1st January 2015.

It is tax charged on all gains obtained by a transferor (individual or company) upon transfer of any property located in Kenya. CGT is applicable regardless of whether the property was acquired before 1st January 2015.

Between 1st January 2015 and 31st December 2022, the rate for CGT tax was 5%. It was amended to 15% of by the Finance Act 2022 and that is still the rate applicable.

CGT is payable on transfer of land, buildings and shares that are not listed in the NSE.

The transactions that are exempt from CGT are:

1. Transactions where the purchase price is less than three million shillings.
2. Income that is taxed elsewhere as in the case of property dealers.
3. Agricultural property that is less than fifty acres and is outside the municipality or a gazette urban area.
4. Charges aimed at securing credit facilities.
5. Transmissions of estate assets.
6. Transfer of assets between spouses.
7. Transfer of assets to a LLC owned by spouses and who hold 100% of the shares.
8. Transfer of private residence where the individual owner has been in occupation for the last three years prior to the transfer.
9. Shares that are not listed in the NSE.

 

Land Rent

Land rent is tax payable to the Government for leasehold properties. It is usually a reserved amount and indicated on the lease.

It is payable annually.

The amount payable is determined by the location of the property, its demand and its quality.

For a conveyancing transaction to be successful where the property being transferred is subject to payment of land rent, it must be paid and a certificate of clearance issued by the Ministry. 

If not paid in time, they attract interest.

The certificate of clearance is part of the documents that accompany the Transfer instrument for registration of the change of ownership.

The essence is that the buyer should obtain a clean title.

 

Land Rates

Land rates are taxes levied and payable to the relevant county government and is used to maintain the property. For instance, improvement of roads, provision of sewerage systems etc.

Unlike land rent, land rates keep changing from time to time because they are assessed based on the current market value of the property.

They are payable annually and attract interest where there is default. Section 16(3) of the Rating Act provides that simple interest shall be charged at the rate of 3% of any unpaid sum. The interest should not exceed the principal sum owed in unpaid rates.

The seller is required to pay and obtain a rates clearance certificate from the relevant county government to pass a clean title to the buyer.

 

Excise Tax

Excise tax is payable at the point of transferring the consideration (purchase price) from the buyer to the seller at the Bank.

 

VAT on sale of commercial buildings

Part II Paragraph 8 of the VAT Act provides that services for supply by way of sale, renting, leasing, hiring, letting of land or residential premises shall be exempt from payment of VAT. It proceeds to define residential premises as land or building occupied or capable of being occupied as a residence but not including a hotel or holiday accommodation.

KRA also published guidelines on taxation of non-residential buildings and which can be accessed here GUIDELINES ON TAXATION OF NON-RESIDENTIAL BUILDINGS (kra.go.ke)

The import of the provisions of the VAT Act and the guidelines issued by KRA is that VAT is payable on sale of commercial buildings.

However, the Courts have interpreted the VAT Act to be ambiguous and recommended that Parliament should amend the Act to remove that ambiguity and directed KRA should not levy VAT on sale transactions for commercial buildings. For instance, in David Mwangi Ndegwa v Kenya Revenue Authority [2018] eKLR, the Plaintiff sued KRA for a refund of Shs.11,200,008.00 being VAT levied and paid to KRA for purchase of a commercial building at the rate of 16% of the value of the building.

The Hon. Court in deciding the matter found that the Plaintiff’s suit was merited and called on KRA to seek clarity from Parliament on what is exempt from VAT. However, the Court declined to grant costs as prayed by the Plaintiff because she opined that the interpretation of that section was open to more interpretation by other Courts and not just one Court’s opinion.

KRA sought stay of execution of this Judgment pending appeal and the position to date is that VAT is payable.