WEEK 8: STAMP DUTY AND CAPITAL

GAINS TAX

Essential Readings

 P.L. Analo, Land Law and Conveyancing in Kenya

 Stamp Duty Act Cap 480, Laws of Kenya

 Income Tax Act

 The Land Act, 2012

 The Land Registration Act, 2012

Outline

1) Stamp Duty

2) Capital Gains Tax

3) Questions to consider

1) STAMP DUTY

Stamp duty is one of the oldest forms of taxation. It is one of the things that a
conveyancing advocate must be vigilant about. As part of conveyancing and taxation,
stamp duty is basically revenue raised by the Government by requiring stamps sold
bythe Government to be affixed to designated documents.

The stamps are affixed or embossed or impressed by means of a red dye or franking or
adhesive revenue stamps. The Stamp Duty Act (Cap 480) Laws of Kenya designates
various conveyancing instruments to be stamped. Section 5 of the said Act demands
that every instrument relating to property in Kenya if specified in the Schedule to the
said Act do fetch stampduty as prescribed.

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 The Stamp Duty Act under Schedule 1 sets out documents that must be stamped,
which include conveyancing instruments. Some documents attract fixed stamp duty
while others ad valorem stamp duty. For example, powers of attorney and agreements
for sale attract fixed stamp duty of Ksh 210.
Ad valorem duty means that stamp duty is assessed on the basis of consideration
of the transaction or value of the property.
Section 5 of the Stamp Duty Act provides that property transactions attract
stamp duty. This includes all property in Kenya except the exemptions to fixed or ad
valorem duty. Documents that relate to transfer of property attract ad valorem duty.
Some with leases determined on an annual rent paid and lease duration.
Stamp duty for charges is based on the amount borrowed. These are further
explained below:

1. Stamp duty on transfer instrument is determined by value of the property (ad

valorem);
2. For a charge, stamp duty is based on amount borrowed. The charge instrument
is used to determine the ad valorem amount; and
3. For a lease, what is looked at is the annual rent payable and duration of the
lease (ad valorem).

Section 6 Stamp Duty Act provides that stamp duty is payable within 30 days from the
date of the execution of the agreement, or if signed outside the country, 30 days from
when the document is received in the country. If you do not stamp during this period,
the documents attract a penalty as set out in section 6 and 19, Stamp Duty Act.
If not sure whether the document attracts stamp duty, you request for an opinion
from the collector of stamp duty. In this case, the stamp duty is paid within 12 days
from receipt of the opinion from collector of stamp duty.
If you have not paid stamp duty, you cannot present the document in court, if
you do so, the judge or magistrate will request stamp duty assessment and then you
will be liable to pay a penalty. These two scenarios attract a different kind of penalty.

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 For purposes of not getting into problems in terms of the failure to pay stamp
duty within the required 30-day timeline, it is advisable that when drafting a sale
agreement in terms of it being one of the transfer documents, the sale agreement should
not be dated until the date when it is to be submitted for assessment to avoid a penalty.
The advocate who transmits the documents for stamp duty payment is the one who
dates them. The same applies for a charge and a lease.

Stamp Duty Payment for Land Transfer

Stamp duty payable for transfer of property located in a city, municipalities, urban areas
or townships is usually 4% of the market value for the property. If the property is
located in rural or agricultural areas, the stamp duty payable is usually 2% of the
property’s market value.

Example 1:

If property is being bought at Ksh 1 Million in Embu town centre, the stamp duty
payable will be Ksh 40,000 (4 per cent of 1 Million). However, if property is being
bought for Ksh 1 Million in an interior rural village in Embu (agricultural land), the
stamp duty payable will be Ksh 20,000.

Example 2:

If property in Nairobi’s Madaraka area is being sold at Ksh 7.5 Million but the
marker price of the property is Ksh 10 Million, the stamp duty will follow the market
value andwill therefore be Ksh 400,000 (4 per cent of 10 Million).
Example 3:

If the property in Green Park estate, located in a township, is being sold for Ksh 20
Million but the market value is Ksh 15 Million, the government will work with the
higher amount of Ksh 20 Million and hence the stamp duty will be Ksh 800,000 (4 per
cent of 20 Million).
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Stamp Duty Payment for Charges/mortgages

Stamp duty payable for charges/mortgages is pegged on the amount secured. According
to Schedule 1 of the Stamp Duty Act (point 24(1) in Schedule 1), for charges, a stamp
duty of Ksh 1 for every Ksh 1,000 is payable.

Assignment 1:

Amy is borrowing 10 Million from KCB Bank to develop her property located in
Machakos Town Block 7/70, a one-acre property and she would like to set up 3
maisonettes for rental. She would like to put up the property worth Ksh 35 Million
assecurity for the loan. How much stamp duty would she pay?

Stamp Duty Payment for Discharge of Charge/mortgage

For a discharge of charge, Schedule 1 of the Stamp Duty Act (point 24(5) in Schedule
1), the stamp duty payable is also pegged on the amount originally secured, for
discharges, a stamp duty of Ksh 0.5 for every Ksh 1,000 is payable.

Assignment 2:

Amy, a prominent lawyer, through a transaction is paid Ksh 20 Million and decides
to pay a Ksh 10 Million loan she had earlier borrowed from KCB Bank with her
property work Ksh 35 Million as security. How much will she pay as stamp duty to
discharge herproperty?

Stamp Duty Payment for Leases

For a lease for any definite term not exceeding one year, Schedule 1 of the Stamp Duty
Act (point 21(1) in Schedule 1) provides that the stamp duty payable is pegged on the
whole amount payable and for every Ksh 1,000, a stamp duty of Ksh 10 is payable.

For a lease for any definite term of not less than one year but not exceeding 3 years,
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where the rent is at a rate or average rate, Schedule 1 of the Stamp Duty Act (point
21(2) in Schedule 1) provides that the stamp duty payable is pegged on the whole
amount payable and for every Ksh 1,000, a stamp duty of Ksh 10 is payable.

For a lease for any definite term of 3 years and above, Schedule 1 of the Stamp Duty
Act provides that the stamp duty payable is pegged on the whole amount payable and
for every Ksh 1,000, a stamp duty of Ksh 20 is payable.

Consequences of Non-Payment of Stamp Duty

1. It is an offence

2. Documents will not be accepted for registration as per section 46 of the Land
Registration Act
3. The documents will not be admitted as evidence

4. A person will be required to pay a penalty

Process of payment of Stamp Duty

If a transfer of property, you surrender the transfer documents with the completion
documents by filling in a form in triplicate for a valuation by the government. The
government valuer then makes an assessment by visiting the property and then gives
the valuation which will determine the stamp duty payable.
As soon as a valuation is done, you need to remind your client of the 30-day
rule so that they avoid a penalty. You then go to the Kenya Revenue Authority and
after filling in the requisite forms you then pay the valuation amount of ad valorem
stamp duty plus Ksh 20 each (Ksh 40 for two copies) stamp duty for each of the two
copies of the documents from KRA. Hence, if you are to pay stamp duty of Ksh 40,000,
you put it as Ksh 40,040.
You are then given the completed documents (more like an invoice) from
KRA and are then to pay the stamp duty in the in Bank. After payment, the duly
completed documents from KRA plus the bank slip evidencing stamp duty payment
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should then be submitted to the Land Registry.

Summary: Currently stamp duty fees is collected directly by the Kenya Revenue
Authority by payment being made to the Authority’s account in commercial banks.
The document together with the stamp duty assessment form and the banking pay-in
slip is then delivered for stamping by the Collector of Stamp Duty. The Collector has
powers to adjudicate and decide whether a document should fetch duty. The process
can be orderly said to include the following steps:
 Applicant presents documents for assessment by Collector of Stamp Duty at the
KRA– fills Form SD1;

 Assessor of stamp duty confirms if duty is payable, counterchecks

information on the form and document, ascertains amount and endorses both
Form and document;

 Assessor assesses the amount of stamp duty payable;

 Applicant pays amount to the KRA in designated bank – KCB or NBK;

 Applicant returns document with proof of payment to Collector of Stamp duty;

 Collector of Stamp Duty reconciles records and stamps document by

frankingmachine;
 Documents are given to accountant/audited by Government accountant
anddispatched then picked for registration.

Who Pays Stamp Duty?

It is the beneficiary of the transaction who pays stamp duty, that is, in a transfer, the
purchaser pays stamp duty. In a charge, it is the borrower who pays stamp duty and,
in a lease, it is the lessee who pays. Stamp duty is a tax and the Stamp Duty Act is thus a
revenue legislation.
Stamp duty affects land transactions more than anything else and it happens that
it is collected by officials in charge of registration through the Collector of Stamp Duty.
It is a tax on documents and in the case of land, it is a tax on the conveyancing
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documents. It is a revenue making machine for the state.
As has been highlighted, the rates of stamp duty and methods of calculating it
are contained in the Stamp Duty Act. Any document which attracts stamp duty must be
stamped within 30 days, otherwise the document will attract a penalty.
Conveyancing experts have found a way around this and normally they will not date
the documentsunless and until they are actually lodging them for registration.
Section 19(2) of Stamp Duty Act states that no instrument chargeable with stamp
duty shall be filed, enrolled, registered or acted upon by any person unless it is duly
stamped.
The conveyancing instruments are stamped by the Collector of Stamp Duty
by having the relevant stamp embossed on the document, The counterpart is also
stamped, normally with a fixed sum of stamp duty of Ksh 4. The Collector of Stamp
Duty then puts denoting stamps of that amount.
In Kenya, we have revenue stamps separate and distinct from postage stamps.
That such revenue stamps are sold by post office is a question of convenience as the
proceeds go to the Central Bank of Kenya. You may have noticed that electricity bills
bear stamp duty revenue and with regard to bank cheques, the bank will have paid the
stamp duty revenue.
Stamp duty is payable by the person responsible for stamping the documents
such as the purchaser, lessee and chargor. Not only will be instrument of conveyance
not be registered, but the instrument will also not be received in evidence unless it bears
appropriate stamp duty. In such a scenario, the issue of non-payment of stamp duty has
to be specifically pleaded. However, this may be cured at any time by paying the
amount of the relevant stamp duty and any penalty payable.
The Act requires that the instruments being submitted for stamping be in English
or, if they are not in English, there be annexed thereto a full and accurate translation
thereto in the English language, certified to the satisfaction of the Collector of Stamp
Duty.

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 EXEMPTIONS FROM STAMP DUTY PAYMENT

The Stamp Duty Act provides some instances where one can be exempted from duty
payable on transfer of property. The exemptions as laid out in the Stamp Duty Act are
as follows:
(1) Section 117: There shall be exemption from stamp duty under this Act –

(a) An instrument executed by or on behalf of or in favour of the

Government in any case which, but for this exemption, the government
would be liable to pay stamp duty;
(b) A bill of exchange, cheque or promissory note drawn or made in
Uganda and Tanzania and accepted and paid or presented for
acceptance or payment or endorsed, transferred or otherwise
negotiated, in Kenya, if the bill of exchange, cheque or promissory note
had previously been duly stamped in Uganda or Tanzania;
(2) A will, codicil or other testamentary disposition, where transfer is by way of
transmission through a will or intestacy.
(3) Section 52(2): ‘A conveyance or transfer, or an agreement for a conveyance or
transfer, operating as a voluntary disposition of property shall not be chargeable
with any duty, if the conveyance or transfer is in favour of:

(a) A body of persons incorporated by special Act and that body is by its
Act precluded from dividing any profit among its members and the
property conveyed is to be held for the purposes of an open space or for
the purposes of its preservation for the benefit of Kenya e.g., a non-
profit organisation or trusts (charitable). This has to be applied for
though;
(4) Any body of persons established for charitable purposes only or the trustees of
a trust so established.
(5) Section 96 – transfer between associated companies

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 (a) stamp duty under the heading conveyance or transfer on sale in the
schedule shall not be chargeable on an instrument to which this section
applies. These are transfers between associated companies where one
company owns at least 90% of the issued share capital of the other
company.
(6) Legal Notice No. 92 of 2007: ‘In exercise of the powers conferred by section
106 of the Stamp Duty Act, the Minister of Finance directs that any instrument
that is executed in respect of the transfer of family property to a limited liability
company whose shares are wholly owned by the family be exempt from the
provisions of the Act.
(a) Application process: a letter that the company is owned by a family,
attaching marriage certificates and/or birth certificates to Collector of
Stamp Duty,
(7) Transfer between husband and wife. Applied by way of letter accompanied
by marriage certificate which is also accompanied by an affidavit to the
Collector of Stamp Duty.
(8) Section 117(hh): ‘instruments for the sale or transfer of land for the construction or
expansion of educational institutions: provided that stamp duty shall become
payable if such land reverts to any other use.
(a) Application process; You annex the documents of registration for the
institution, the directors in the search and an affidavit that the property
has been set aside for educational purposes. This is then presented to the
collector of Stamp Duty who then approves and then the instrument
willbe exempted for stamp duty and can be registered.
(9) Section 29(2)(e) – Export Processing Zone Act and Stamp Duty Act

(a) Section 117(j) – ‘exemptions of all instruments with respect to licenses of

business activities of an export processing zone (EPZ), enterprise licenced
under the Export Processing Zone Act Cap 517).’
(b) Section 29(2)(e) EPZ Act – ‘exemption from stamp duties on the

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 execution of any instrument relating to business activities of or an export
processing zone enterprise.’
(10) The Central Bank is exempted from paying taxes under the Central Bank Act.

(11) Shelter-Afrique: Under the Shelter-Afrique Act Cap 493C, Laws of Kenya,
section 7, ‘In any transaction which Shelter-Afrique is a party, Shelter-
Afrique shall be exempted from all stamp duty and documentary taxes.’
Shelter-Afrique is the only Pan-African Finance institution that exclusively
supports the development of the housing and real estate sector in Africa. It
has its headquarters in Nairobi, Kenya and has raised over 400 Million USD
and financed over 15,000 housing units in its over 31 years of operations.

2) CAPITAL GAINS TAX

It is deemed to be income, hence governed by the Income Tax Act. It is not new. It was
suspended in 1985 and was reintroduced effective 1 January 2015. It is a tax chargeable on
the whole of a gain which accrues to a company or an individual on or after 1
January 2015.

CGT was reintroduced through the Finance Act, 2014 for the following reasons:

(a) To promote horizontal and vertical equity in taxation by ensuring fair

sharing of tax burden;
(b) To enhance market efficiency by minimising speculation;

(c) To minimise tax avoidance and evasion because CGT eliminates tax advantage
from those who may shift from other income generating investments to
property expecting untaxed gains on transfer;
(d) Internationally, including all other East African Community countries, CGT
hasgenerally been embraced.

The reintroduction came vide amendments to Income Tax Act:

(a) Section 34(1) of the by insertion of a new paragraph(j) which introduced a rate
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 of 5% on capital gains; and
(b) Paragraph 2 of the 8th Schedule to the Act (on taxation of gain) as read together
with Section 3(2)(f) of the Act.

What is the rate of tax?

The rate is 5% of the net gain. It is usually a final tax and cannot be offset against other
income taxes.

Who is liable to pay tax?

The tax is to be paid by the person (resident or non-resident) transferring the property,
that is, the transferor. The transferor can either be an individual or a corporate body.

What constitutes a transfer?

A transfer takes place:
(a) Where a property is sold, exchanged, conveyed or disposed of in any manner
including by way of a gift; or
(b) On the abandonment, surrender, forfeiture, cancellation or expiration of rights
to the property.

How do you determine the net gain?

The net gain is the excess of the transfer value over the adjusted cost of the property
that has been transferred, it is this excess that is subjected to tax at 5%.
The transfer value of the property is the amount of value of consideration or
compensation for transfer of the property less incidental costs on such transfer.
The adjusted cost is the sum of the cost of acquisition or construction of property;
expenditure for enhancement of value and/or preservation of the property; cost of
defending title or right over property, if any; and the incidental costs of acquiring
theproperty.
The adjusted cost shall be reduced by any amounts that have been previously allowed
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as deductions under section 15(2) of the Income Tax Act. Once the CGT payment has
been completed, the seller is to send a copy of the CGT payment slip to the purchaser
so that the purchaser can attach this when paying stamp duty.

Example 1: Transfer Value Computation

Assume that the sale proceed was Kshs. 2,000,000 and the incidental costs were Legal
fees- Kshs. 100,000; Advertisement – Kshs. 50,000; Agent’s commission – Kshs.
200,000 and Valuation fees – Kshs. 150,000.

Sales proceeds Ksh 2,000,000

Less Incidental Costs:

legal fees Ksh 100,000
Advertisement Agents Ksh 50,000
commission Valuation Ksh 200,000
fees Ksh 150,000 Ksh 500,000

Transfer Value Ksh 1,500,000

Computation of Capital Gains Tax Thereon:

Transfer value less adjusted cost (Ksh 2,000,000 – Ksh 1,500,000) = Ksh 500,000 Tax at
5% of Gain (5% x Ksh 500,000) = Ksh 25,000

What is the due date for paying CGT/tax point?

It is a transaction based tax and should, therefore, be paid upon transfer of property

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but not later than the 20th day of the month following that in which the transfer was
made. But this requirement has been rendered moot because of the case taken to court
by the Law Society of Kenya in Law Society of Kenya v Kenya Revenue Authority &
Another [2017] eKLR, where the LSK argued that the requirement of payment of CGT
in advance, before the purchaser pays stamp duty and/or making any transfer, may
disadvantage a seller who has not been paid yet.

Paragraph 11A of the 8th Schedule of the Income Tax Act provided that the CGT is
paid on or before transfer of property, at the same time with stamp duty payment. LSK
challenged this requirement by KRA and the court eventually ruled that paragraph
11A was unconstitutional inasmuch as it limited the right to freely transfer property.
The KRA appealed the decision and was in contempt of the High Court’s decision
declaring the requirement to pay CGT before registration of land unconstitutional.

Kenya Association of Stock Brokers and Investment Banks v Attorney General &
Another [2015] eKLR
The petitioners went to court on four key issues:

(1) Whether re-introduction of CGT was unconstitutional because it was

passed without public participation as required under Article 201 of the
Constitution. Ruling
No violation since the Finance Bill which re-introduced it was in the standing
orders of the National assembly.

(2) Whether introduction of CGT providing for a rate of 5% while paragraph 16

of the 8th schedule of the Income Tax Act provides for 7% is inconsistent with
Article 10 of the Constitution which requires transparency and clarity.
Ruling

The effect of the re-introduction at 5% was to impliedly repeal the provisions

of paragraph 16 of the 8th schedule and therefore not unconstitutional.

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 (3) Whether charging CGT on sale of properties acquired before 1 January, 2015
contravenes Article 40 as it has a retroactive effect, thus infringing on property
rights protected in the Constitution.
Ruling

The provisions re-introducing CGT are not retrospective in effect and do not,
therefore, violate and threaten the right to property under Article 40.

(4) The applicant based the application on unfair administrative action.

(a) That it was unreasonable for the respondent to require simultaneous

payment of Stamp Duty and Capital Gains Tax on sale of land by chargee
pursuant and chargee’s power of sale.

Ruling

Prayer granted but the respondents, KRA, appealed.

(b) That it is unreasonable, unfair and an error in law for the respondent to
require payment of CGT by chargee or purchaser on the sale of land by
chargee in pursuant to chargees power of sale without first ascertaining
whether there is capital gain.
Ruling

Prayer granted but the respondents, KRA, appealed.

Additional Challenges

(a) Records on acquisition costs and other allowable expenses on properties subject
to CGT were not preserved to enable taxpayers support their claims;
(b) The re-introduction after 30 years required a lot of time to sensitise stakeholders;
and
(c) Relevant Sections and Schedules of the Income Tax Act required amendments in
order to be in harmony with the changes which have taken place since 1985.

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How is the tax to be declared?

The taxpayer will do a self-assessment to determine the gain upon which tax is
computed. The computations are subject to commissioner’s confirmation of correct gain
as the basis of tax computation.
Upon transfer of property, the transferor shall complete the relevant form (CGT
1) as appropriate and compute and pay the tax thereon.

What happens when a loss is made?

The loss may be carried forward to be offset/deducted against a gain of a similar nature
(that is, a capital gain) at a future date.

What documents/information will be required?

(a) A completed CGT form by the seller;

(b) Copy of sale/transfer agreement of the property;

(c) Proof of the incidental costs related to the acquisition and transfer of the
property;
(d) A copy of the title deed or ownership document for the property;

(e) Report from a registered valuer for property transactions between related
parties;
(f) Any other document/information that the commissioner may require.

Exemptions from Capital Gains Tax Payment

Certain transactions are exempted from CGT as follows:

(a) Income that is taxed elsewhere as in the case of property dealers;

(b) Issuance of a company of its own shares and debentures;

(c) Transfer of machinery including motor vehicles;

(d) Disposal of property for purpose of administering of an estate of a deceased

person;
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 (e) Vesting of property in the hands of a liquidator or receiver;

(f) Transfer of individual residence occupied by the transferor for at least three years
before the transfer;
(g) Compensation by the Government for property acquired for
infrastructuredevelopment;
(h) Transfer of assets between spouses as part of divorce settlement;

(i) Sale of land by an individual where the proceeds is less than Ksh 3,000,000;

(j) Sale of agricultural land by individuals outside gazetted townships where the
property is less than 40 acres;
(k) Exchange of property necessitated by incorporation, recapitalisation, acquisition,
amalgamation, separation, dissolution or similar restructuring involving one
or more companies which is certified by the Cabinet Secretary to have been
donein the public interest;
(l) Transfer of property for purposes of securing a debt or loan;

(m) Transfer by a trustee of property to a beneficiary on his/her becoming

entitledthereto; and
(n) Transfer of property to a wholly family-owned property between spouses.

Consequences of Non-Payment or Late Payment of Capital Gains Tax

Non-payment of CGT is a criminal offence under section 107 of the Income Tax Act. In
addition, the KRA may recover the outstanding amount by suing the taxpayer under
section 39 of the Tax Procedures Act.
Late payment of CGT, on the other hand, attracts penalty interest at a rate of
1% per month or part of a month on the amount of tax remaining unpaid. The interest
period commences on the date the tax was due and ends on the date the tax is paid
(section 38, Tax Procedures Act).

Note: Capital Gains Tax is paid as part of income tax, while stamp duty is paid to
thecollector of stamp duty.
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