Capital Gains Tax (CGT) is the income tax charged on the net gain made after a sale or transfer of property or shares of private companies in Kenya.

The applicable rate is 15% of the net gain. Net gain is the transfer value less incidental costs on the transfer, and adjusted costs (acquisition costs + incidental costs on acquisition plus any enhancement costs).

Principle of CGT Rebasing

While CGT does not apply to inherited property, where such property is subsequently sold, the profit realized is subject to CGT. Since the acquisition cost in such a case is zero, a base cost is used, which is the fair market value of the property at the time of inheritance.

Paragraph 9 of the Eighth Schedule of the Income Tax Act provides that where property is acquired or transferred between persons who are related, the value of the property shall be equivalent to the market value of the property at the time of the acquisition.

The courts emphasized this in Commissioner of Domestic Taxes v Shah & 2 others [2024] KEHC 7802 (KLR), where 3 siblings inherited 2 parcels of land from their father in 2015. The market value at the point of inheritance was stated as Kshs 398,619,600.00. They sold the property in 2020 for K.shs. 305,584,000.00, incurring a capital loss, thus no CGT liability.

KRA, however, argued that their acquisition cost was zero, demanding CGT on the full proceeds. The Tax Appeals Tribunal ruled in favour of the siblings that the market value at inheritance should be used as the cost base, a decision that was upheld by the High Court.

The 5 year rule under Finance Act 2023

The Finance Act 2023 introduced a caveat to the rebasing principle where property is transferred in a transaction that is not subject to CGT i.e inherited property, and the property is subsequently sold within a period of less than 5 years, the adjusted cost in the sale shall be based on the original adjusted cost as determined in the first transfer to the previous owner.

The monetary consequence of this is enormous. See the illustration below:

• A son inherits a property bought by the father 25 years ago at  K.shs. 1 Million.
• The value of the property at the point of inheritance was at K.shs. 25 Million.
• Where the property is sold before the lapse of 5 years from the date of inheriting the property, the value of K.shs. 1 Million will be used when computing CGT. Implying that the CGT payable will be higher as compared to when the property is sold 5 years after the inheritance in which case, the value of Kshs. 25 Million will be the cost used during adjustment.

Conclusion

When dealing with inherited property, it is crucial to obtain a valuation at the time the property is inherited. This valuation is important for future reliance if the property is sold.

Additionally, the timing of the sale is significant, especially considering the 5-year rule mentioned earlier. Consulting with experienced estate planning advisors will ensure that you receive comprehensive guidance.

For further information, please reach us at info@cfllegal.com.