Real estate taxes in Kenya are levied and paid to state and county governments. The funds generated from real estate taxes are used to help pay for local and state services.
Below are some of the taxes charged, both by the national and county government relating to land;
1. 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.
2. Land Rent
Land rent is levy imposed on leasehold parcels of land where the annual rent has been reserved at the time the grant is being issued and its payable to the Ministry of Lands and Physical Planning
3. Income Tax
Income Tax Act (ITA) provides the framework for imposition of taxes on income from among others land. The main income taxes payable in respect of Land are Capital Gains Tax (CGT) and tax on rental income.
CGT is a tax chargeable on the gain on transfer of land, building and shares. This tax was re-introduced in 2015 having been suspended in 1985. CGT is charged at the rate of 15% of the gain.
The tax on rental income is a tax arising from the gains and profits for occupation of property. The ITA provides for various ways of taxing rental income;
Where the rent is payable to a non-resident, the tenant is required to withhold 30% of the rent and remit it to the Kenya Revenue Authority. The tax withheld is a final tax.
Where the rent is payable to a resident, if the property is commercial, the tenant being an appointed agent, is required to withhold 10 % of the rent. The tax withheld is not a final tax and the landlord is required to file their income tax in the usual way.
Where the rent is payable to a resident and the property is residential, the landlord may opt to either pay a monthly rental income tax, computed at 10 % of the gross rent a (final tax) or pay the instalment tax and final income tax in the usual way.
4. Stamp duty
Stamp duty, provided for under the Stamp Duty Act, Cap 480, is a tax payable on various instruments. Stamp duty is charged on instruments relating to land such as transfers, charges and leases on land. The rate of stamp duty is based on the instruments, the user of the property and the time of payment among others. There are various exemptions to payment of stamp duty granted under the Stamp Duty Act.
5. Value Added Tax (VAT)
Value Added Tax (VAT) is chargeable on commercial rental income and is charged to the tenant at a rate of 16%. Under that Value Added Tax Act, VAT is payable on the sale of commercial land at the standard rate of 16%.
In 2018, however the High Court ruled that VAT is not payable on the sale or purchase of land, irrespective of the nature of buildings standing (whether residential or commercial). The high court relied on the VAT Act (VATA) 2013, that specifically exempts the ‘supply by way of sale, renting, leasing, hiring, letting of land or residential premises’ from VAT. It will be interesting to see the results if/when KRA appeals this verdict.
As property taxes play a crucial role in home ownership, this should be a key area of consideration by policy makers to ensure that the objectives of the affordable housing agenda are realised as envisaged by the Government. The tax regime in Kenya can be quite confusing unless you are a seasoned real estate or tax professional. Please seek expert opinion when conducting your real estate transactions. You could alternatively give us a call for a free consultation.