AN INVESTIGATION INTO THE CHALLENGES AFFECTING THE

IMPLEMENTATION OF CAPITAL GAINS TAX ON REAL PROPERTY IN

KENYA;

A CASE STUDY OF NAIROBI COUNTY

A RESEARCH PROJECT SUBMITTED IN PARTIAL FULFILLMENT OF

BACHELOR OF REAL ESTATE IN THE DEPARTMENT OF REAL
ESTATE, UNIVERSITY OF NAIROBI

PRESENTED

BY

VICTOR M. MUTIE

REG NO: B04/31640/2014

FEBRUARY 2018
 DECLARATION

STUDENT DECLARATION

I, MUEMA VICTOR MUTIE, do declare that this project is my original work and has
not been presented for a degree in any other University

Signature: ………………… Date: …./……./………..

MUEMA VICTOR MUTIE

Registration Number: BO4/31640/2014

SUPERVISOR DECLARATION

This project has been submitted for examination with my approval as a University
Supervisor.

Signature: ………………… Date: …./……../………

DR. WINNIE MWANGI

Senior Lecturer

Department of Real Estate and Construction Management

University of Nairobi

ii
 ACKNOWLEDGMENTS

I am greatly privileged and honored to present this work to the University of Nairobi
and in great gratitude for being given the opportunity to study and pursue my
undergraduate education.

I am indebted to my supervisor Dr. Winnie Mwangi for her grace, relentless efforts,
criticism and understanding during the entire research period. Additionally, I would
like to also thank Dr. Beth Mutilu, my mother, for her input that has promoted
towards excellence in the presentation of this paper. I acknowledge the support of the
entire Department of Real Estate and Construction Management for their cooperation
and guidance.

Finally, I would like to thank all the conveyancing lawyers, Kenya Revenue
Authority; Capital Gains Tax Department, the efforts and advice of Evans Muema
Wele a colleague and a good friend, Kirk Katwa and Chris Mwangi; practitioners at
Lloyd Masika Ltd (Valuation and Property Management Firm) for their support and
input to this research and Richard Onchuru, Esq. for his guidance on legal matters.

To you all, God bless you.

iii
 DEDICATION

I dedicate this project to God Almighty for giving me the wisdom, grace, endurance
and diligence in the writing of this research paper. I take privilege in devoting this
project to my parents (Josephat and Dr. Beth Muema) for their endless
encouragements, support all round; morally, emotionally and financially that has seen
through to the completion of this project. Their love and kindness shall not go
unnoticed. I also dedicate this project to my wonderful twin sister (Charity Muema)
for her constant love and support that has seen me through the compilation of this
project.

I commit this project to the Capital Gains Tax Department; Kenya Revenue
Authority, valuers and conveyancing lawyers in practice and the University of
Nairobi.

iv
 TABLE OF CONTENTS

DECLARATION.........................................................................................................ii

ACKNOWLEDGMENTS..........................................................................................iii

DEDICATION............................................................................................................iv

LIST OF TABLES.......................................................................................................x

LIST OF FIGURES....................................................................................................xi

GLOSSARY OF ACRONYMS................................................................................xii

ABSTRACT..............................................................................................................xiii

CHAPTER ONE..........................................................................................................1

1.0. Introduction.........................................................................................................1

1.1. Problem statement...............................................................................................1

1.2. Objectives of the study........................................................................................3

1.3. Research Questions.............................................................................................3

1.4. Research hypothesis............................................................................................3

1.5. Significance of the study.....................................................................................4

1.6. Scope of the study...............................................................................................5

1.7. Organization of the study....................................................................................5

CHAPTER TWO.........................................................................................................6

LITERATURE REVIEW...........................................................................................6

2.1. Introduction............................................................................................................6

2.2. History of Capital Gains Tax in Kenya..................................................................7

2.3. Capital Gains tax models........................................................................................7

2.3.1. An Accrual-based capital gains tax.............................................................7

2.3.2. A Realization-based Capital Gains Tax......................................................8

v
 2.3.3. Common problems to both models.............................................................9

2.4. Roles and Contributions of Capital Gains tax to the real property market.............9

2.5. Challenges facing implementation of CGT..........................................................11

2.6. Real Property Taxation in Kenya.........................................................................12

2.6.1. Introduction...................................................................................................12

2.6.2. Types of Real Property Taxes in Kenya........................................................14

a. Role of Property Tax in Kenya.....................................................................15

2.6.3. Background to Capital Gains Tax in Kenya..................................................16

a. Revenue justification.....................................................................................17

b. Adjusted Capital Gains Tax Rate..................................................................17

c. Capital Gains tax on non-residents...............................................................17

2.6.4. Property Taxation Legal Frameworks in Kenya...........................................18

a. The Stamp Duty Act Cap 480.......................................................................18

b. The Income Tax Act Cap 470 Eighth Schedule............................................18

2.7. Capital Gains Tax practices in other countries.....................................................21

2.7.1. Capital gains tax in Nigeria...........................................................................21

a. Assessment of CGT in Nigeria.....................................................................21

2.7.2. Capital Gains Tax in Australia......................................................................22

a. Assessment of CGT in Australia...................................................................24

CHAPTER THREE...................................................................................................25

RESEARCH METHODOLOGY.............................................................................25

3.1. Introduction..........................................................................................................25

vi
3.2. Research Design...................................................................................................25

3.4. The Population......................................................................................................26

3.5. The Sample...........................................................................................................27

3.5.1. Sampling technique...................................................................................28

3.5.2. Sampling size and its determination.........................................................29

3.6. Data Collection.....................................................................................................32

3.7. Data analysis and presentation..............................................................................33

CHAPTER FOUR......................................................................................................34

DATA ANALYSIS AND REPRESENTATION.....................................................34

4.1. Response rate........................................................................................................34

4.2. General Information of respondents.....................................................................34

4.2.1. Level of education.....................................................................................35

4.2.2. Level of Experience..................................................................................36

4.3. Level of awareness on Capital Gains Tax............................................................37

4.3.1. Level of awareness....................................................................................37

4.3.2. Clients awareness on CGT........................................................................37

4.3.3. Creation of awareness by the proper regulatory bodies............................38

4.3.4. Availability of Information.......................................................................39

4.3.5. Most appropriate channels to create awareness........................................39

4.4. Professional responsibility and challenges...........................................................40

4.4.1. Type of properties mostly transferred.......................................................40

4.4.2. Practice of fiduciary obligations by professionals....................................41

vii
 4.4.3. Willingness to pay CGT by Clients..........................................................42

4.4.4. Rate of convenience of CGT remittance in Kenya...................................42

4.4.5. Problems experienced by professionals....................................................43

4.4.6. Common models of CGT practiced and their problems...........................45

4.5. Implementation challenges facing CGT in Kenya................................................46

4.5.1. Assessment of creation of revenue through CGT in Kenya......................46

4.5.2. Stifling of entrepreneurship on real property in Kenya by CGT..............48

4.5.3. Reasons why CGT was re-introduced in Kenya.......................................48

4.5.4. Do skeptics of capital gains tax affect its implementation........................49

4.5.5. Opinions on measures to be employed by the government to promote the

implementation of CGT in Kenya.......................................................................50

4.5.6. Influence of other factors affecting implementation of CGT....................50

4.6. How to overcome implementation challenges affecting CGT on real property in

Kenya....................................................................................................................51

4.7. Hypothesis testing for this study...........................................................................52

CHAPTER FIVE.......................................................................................................53

A SUMMARY OF FINDINGS, RECOMMENDATIONS, AND CONCLUSIONS

...........................................................................................................................53

5.1. Introduction:..........................................................................................................53

5.2. Summary of Findings and Conclusions................................................................53

5.3. Recommendations.................................................................................................55

5.4. Areas of further study............................................................................................58

viii
REFERENCES...........................................................................................................59

APPENDICES............................................................................................................62

APPENDIX A.............................................................................................................62

APPENDIX B.............................................................................................................67

APPENDIX C.............................................................................................................68

ix
 LIST OF TABLES

Table 3. 1 Respondents and their population sizes......................................................30

Table 3. 2 Respondents and their sample sizes............................................................31

Table 4. 1 Response rate..............................................................................................34

Table 4. 2 Influence of other factors affecting implementation of CGT.....................50

x
 LIST OF FIGURES

Figure 4. 1 Profession of the respondents....................................................................34

Figure 4. 2 Level of education.....................................................................................36

Figure 4. 3 Level of experience....................................................................................36

Figure 4. 4 Level of awareness on CGT by Professionals...........................................37

Figure 4. 5 Clients awareness on CGT.........................................................................38

Figure 4. 6 Creation of enough awareness by proper regulatory bodies......................38

Figure 4. 7 Availability of information on CGT..........................................................39

Figure 4. 8 Channels for creating awareness...............................................................40

Figure 4. 9 Type of properties mostly transferred........................................................41

Figure 4. 10 Practice of fiduciary obligation by professionals....................................41

Figure 4. 11 Willingness to pay by clients...................................................................42

Figure 4. 12 Rate of convenience of CGT remittance.................................................43

Figure 4. 13 Problems experienced by professionals...................................................43

Figure 4. 14 Common models and their rate of awareness..........................................45

Figure 4. 15 Assessment of creation of revenue through CGT....................................47

Figure 4. 16 Stifling of entrepreneurship by CGT in Kenya........................................48

Figure 4. 17 Reasons for re-introducing CGT.............................................................49

Figure 4. 18 Analysis of whether skeptics of CGT affect its implementation.............49

xi
 GLOSSARY OF ACRONYMS

CGT - Capital Gains Tax

KRA - Kenya Revenue Authority

LIMS - Land Information Management System

UN-HABITAT - United Nations HABITAT Programme

KPMG - Klynveld Peat Marwick Goerdeler audit company

GDP - Gross Domestic Product

LSK - Law Society of Kenya

xii
 ABSTRACT

Capital Gains Tax in Kenya was first introduced in 1975 and later suspended in 1985
to spur investment in the real estate sector. However, it was later reintroduced in 2014
and took effect as from the 1 st of January, 2015 until to date. There has been a notable
effect after its reintroduction. The research focused more on the real property market
affected by the reintroduction of Capital Gains Tax. The main objectives of this
research paper were to investigate into the challenges affecting the implementation
and addressing specifically on the role of CGT on real property market in Kenya, case
study of Nairobi County with stakeholders such as the Valuers, Estate Agents, Tax
administrators, lawyers and the general public in consideration.

The study reviewed the common practices of capital gains tax both in Kenya and
other countries, addressing the common models practiced in the implementation of
capital gains tax on real property in Kenya. Roles and contributions of the capital
gains tax on the real estate market in Kenya, challenges affecting the players involved
in the implementation of capital gains tax and the researcher was determined to
identify possible solutions to the problems identified stifling implementation of CGT.

The research employed qualitative research method and a case study of Nairobi was
seen as most ideal considering it is the business hub and hosts many of the property
transactions. A sampling technique was determined and a sample size of 65
respondents was determined using stratified sampling and simple random techniques.
These respondents included; Valuers, Estate Agents, Lawyers and Tax administrators
and questionnaires were administered to them to retrieve relevant information
necessary for the compilation of this study. Other sources of information included;
journals, scholarly articles and publications.

The outcomes and findings of the study gave suggestions that there is indeed a lack of
awareness of capital gains tax since the necessary bodies responsible for this are not
performing their fiduciary obligation. Also, there is need to justify the importance of
capital gains tax to improve confidence on this tax and provide platforms for trainings
on CGT by all stakeholders. The researcher also identified that most clients are
unwilling to pay capital gains tax.

xiii
The conclusions and recommendations of the study finalized that; creating more
awareness on CGT, implement policies that govern capital gains tax in Kenya,
involvement of all stakeholders in the implementation of capital gains tax,
synchronizing transactions between the tax compliance body (KRA) and the Ministry
of Lands to improve transparency and accessibility of information and engaging the
body in identifying possible problems they face in the implementation of CGT and
help in suggestions of solving the identified problems.

xiv
 CHAPTER ONE
1.0. Introduction

Real property tax is a tax imposed on real property; which includes land, buildings or
any other improvement that may cause an increase on the value of land. This property
tax is imposed and assessed by local or municipal governments. The forms of real
property tax include; stamp duty, which is a form of tax assessed on real property
during the sale or lease of the property. This form of tax is payable by the transferee
in the event of a transfer of a property. Land rates is another form of levy imposed on
all parcels of land and is payable to the municipal or county government, depending
on the laws in different countries. In the event of payment, one is issued a clearance
certificate which includes all rates due and accrued interests have been paid. Capital
gains tax is also a form of real property tax which is imposed or assessed on the gain
that accrues to an individual or a company during the transfer of a property. This is
usually payable by the transferor in the event of a transfer of real property

In this research, Capital gains tax on real property in Kenya will be more addressed
since it is the main point of interest. Capital gains tax was first introduced in Kenya in
1975 but later suspended in 1985 to encourage investment in the real estate industry
as well as spur growth in the stock market. It was however reintroduced in 2014 and
took effect on the 1st of January, 2015, henceforth. Therefore, capital gains tax is
chargeable on the gain that accrues during the transfer of property situated in Kenya
on or after 1st January 2015, whether or not the property was acquired before 1 st
January, 2015. The rate of this form of tax is 5% on the net gain. The transfer value
provided for in section 7(1) of the Income Tax Act is the amount or value of
consideration or compensation for transfer of property less incidental costs on such a
transfer.

This study will majorly review and assess the impact of implementation of capital
gains tax on real property in Kenya and practices in other countries. This research will
add to the already existing pool of knowledge, information about Capital Gains Tax.

1.1. Problem statement

The gain that accrues on the transfer of real property will obviously attract investors
into the real estate industry. However, when tax is involved and is seemingly

1
intensified, the tree, which is the real estate industry, that has borne fruits will
consequently start to shed its branches, the investors. The industry will no longer be
lucrative. This is the picture painted after the reintroduction of capital gains tax on
real property in Kenya.

Therefore, the reintroduction and implementation of Capital gains tax on real property
has resulted to different outcomes. (Nooks, 2015) notes that the implementation of
capital gains tax on real property has reduced speculation on real property since
investors in the real property market have been known to own large portfolios of
properties and release them when their prices escalate, so as to make sizable fortunes,
with no work involved. But this is not the case for the rest of the investors in the
market.

The net gain accrued during the transfer of property has been seen as means of
creating wealth to the investors in the market, but the imposition of capital gains tax,
which is 5% of the net gain, has discouraged this form of business in the industry,
considering the fact that stamp duty, legal fees, advertising costs if any and other costs
during the transfer of the property are incurred by the person acquiring the property.
Therefore, the fairness of capital gains tax has proven to be a long-standing and a
contentious issue in this case.

According to (Karinga, 2015)capital gains tax is thought to discourage investment

stifle entrepreneurship and eventually in the long-run, damage the country’s economy.
Moreover, in Kenya, the information gap that has existed since the reintroduction of
capital gains tax on 1st January 2015 since its suspension in 1985, has contributed to
misconceptions of capital gains tax in general. The ripple effect of this is that is has
resulted to little or no information to taxpayers on Capital gains tax concept.

The above observations have therefore demanded the question, whether the
reintroduction and implementation of capital gains tax on real property in Kenya is a
viable form of tax or not. The purpose of this research project is to address the
problem of whether the implementation of this form of taxation on real property
stifles the growth of the real estate industry or promotes it. Considering the fact that
the industry has proven to spur growth in the economy and attracted dozens of
investors, the last thing expected is the imposition and administration of unnecessary

2
taxation on the gains acquired by investors. These issues have provoked the
researcher to interrogate the capital gains tax on real property, assess its role and
determine whether it affects the real property transactions or not. It is therefore
expected that this research will yield crucial information from which
recommendations will be made.
1.2. Objectives of the study
Main objective of the study is to assess the role of CGT on the growth of real property
industry.
Specific objectives of this study include;
1. Review of capital gains tax practices on the property market in Kenya and other
countries.
2. To evaluate the role of capital gains tax to the real property market in Kenya and
other countries.
3. To assess the challenges faced by the players in the administration of Capital
Gains Tax.
4. To recommend on how to overcome the identified problems.

1.3. Research Questions

This study will be guided by the following research questions;
1. What are the common practices of capital gains tax on property market both in
Kenya and other countries?
2. What is the role of capital gains tax to the real property market in Kenya and other
countries?
3. What are the challenges faced by key players in the administration of Capital
Gains Tax?
4. What are the recommendations to the identified problems?
1.4. Research hypothesis
The implementation of capital gains tax on real property has raised questions on
whether it is a viable form of tax on real property besides other forms of tax.
Null Hypothesis (Ho); CGT has a negative role on the growth of the real property
industry in Kenya.
Alternative Hypothesis (H1); CGT has a positive role on the growth of the real
property industry in Kenya.

3
1.5. Significance of the study

The study on the impact of the implementation of capital gains tax on real property in
Kenya should provide a baseline for understanding the general and the specific factors
that have impacted the real property market through the reintroduction and
implementation of capital gains tax. The research should address; the viability of
imposing capital gains tax on real property and this will information will be useful to
the various stakeholders in the real estate industry, challenges facing the
implementation of capital gains tax on real property in Kenya and possible measures
towards the promotion of this form of tax. Stakeholders in this research include; the
tax implementing authority (Kenya Revenue Authority), policy makers in the
government and the Real Estate and Economic professionals as well as scholars in the
school of the Built Environment.

The tax implementing authority, Kenya Revenue Authority will benefit from this
research since they will receive feedback on the result of the information gap on
Capital gains tax that has caused misconceptions on the same and therefore the
researcher will have the privilege of assessing the possible measures that can be
employed in promoting the implementation of Capital Gains tax on real property. The
findings and recommendations of this research will provoke the authority to provide
more information on capital gains tax on real property so that its implementation will
be received with fewer restrains and skeptics therefore working for their good as it
will improve collection of revenue from all transactions on real estate.

Government policy makers will find this research useful as it will eventually point out
working practices of capital gains tax on real property in other countries. From this,
they can borrow functional practices on this form of tax as it will be illustrated in this
research. This will enable them formulate amendments on the current legislations
governing capital gains tax in Kenya.

Real estate economists and professional will no longer walk blindly as they debate on
whether the implementation of capital gains tax on real property is a necessary form
of tax since this research will evaluate on the aforementioned contentious issue and
try to fill the information gap that exists on capital gains tax.

4
Finally, the general public will have a better understanding on the practices of capital
gains tax during the transfer of real property, both in Kenya and other countries. They
will also be comprehensive on the legislative and institutional frameworks on capital
gains tax in Kenya. The information achieved from this research will also create more
confidence in the general public to participate in paying of tax since they will in a
better position to understand the need for paying this tax. The research and its
findings will also add to the ever growing pool of knowledge on Capital gains tax.

1.6. Scope of the study

The purpose of this study is to do a review of the common practices on capital gains
tax on real property and try to fill the information gap that exists as it addresses the
challenges affecting the implementation of Capital gains tax on real property. The
geographical scope of this study will mainly focus on Nairobi County.
This study mostly targets the tax implementing authority, conveyancing lawyers as
key data respondents for data collections. The research will be within a defined time
and budget.
1.7. Organization of the study
This study has five chapters. Chapter one provides a general introduction of the study,
the problem statement, and objectives of the study, research questions, and the
research hypothesis, significance of the study, the scope of the study and the
organization of the chapters.
Chapter two covers the theoretical framework purposely to give ground to the study.
It includes a literature review of capital gains tax practices and legislative frameworks
involved. This chapter also forms a basis on the methodology of collection of data.
Chapter three dwells on research methodology. It comprises of the research design,
the population, the sample, sample size and its justification, sampling procedure and
data collection by use of questionnaires as well as data analysis and presentation.
Chapter four comprises of the data analysis and presentation gathered from the
fieldwork. The analysis generates findings and they are presented in pie charts, graphs
and frequency tables.
Chapter five finally presents a summary of findings, conclusions and
recommendations. It also addresses the limitations of the study and areas for further
studies are also mentioned.

5
 CHAPTER TWO
LITERATURE REVIEW

2.1. Introduction

Property tax is generally levied on all types of property inclusive of; residential,
commercial, industrial, and agricultural and beach properties. Tax on land and
improvement on land has both fiscal and non-fiscal effects meaning the estimated net
impact it has after collection for revenue purposes and non-revenue purposes. The
extent to which the government has control over the collection of real property tax
determines expenditure decisions therefore the level, design and control of property
taxation in many countries are critical aspects for effective decentralization (Bird &
Slack, 2012). Some countries tax land alone, others tax improvements alone but most
countries both land and improvements.

Types of these property taxes include; estate tax transfer taxes, stamp duty, capital
gains taxes, valued-added taxes, estate tax inheritance taxes and land rents and rates.
In detail; transfer tax is a tax levied on the transfer of title from one person or entity to
another; it is usually paid by the grantor. Stamp duty is a property tax levied on
various transactions such as property, shares and stocks. Value-added tax is also a
form of tax that is levied on an entity or item basing on its increased value over each
period of production or distribution. Capital gains tax, which is the main topic of
concern is a tax levied on the gains accrued on the transfer of real property, stocks and
shares and its rates vary in different countries, as other forms of taxes. Estate tax is tax
assessed on the estate of a deceased and Inheritance tax is a tax when a person inherits
money or property from a person who has died. Land rents and rates; also called split
rate tax is ad valorem levy on the unimproved value of land.

Role of property taxes in most developing countries if not all is for revenue purposes.
According to a study by (Bird & Slack, 2012), property taxes account for 40% of all
sub-national taxes in developing countries and 35% of sub-national countries in
developed countries. Therefore, dependence of property tax as a source of local
revenue varies across jurisdictions depending upon factors like; expenditure
responsibilities assigned to local governments, revenues available to them, the degree

6
of freedom local governments have with respect to local taxation, the size and growth
of the tax base available and their willingness and ability to enforce such taxes.

2.2. History of Capital Gains Tax in Kenya

Capital gains tax was first introduced in Kenya in 1975 as the eighth schedule to the
Income Tax Act but later suspended from 13th June 1985.This was done to spur
growth in the real estate industry and other forms of investment. It was however
reintroduced in December, 2014 through The Finance Act, 2014, and took effect from
the 1st of January, 2015, (KPMG, 2016). Capital gains tax is defined as tax on capital
gains, the profits realized on the sale of a non-inventory asset that was purchased at a
cost amount that was lower than the amount realized on the sale. The most common
capital gains are realized from the sale of stocks, bonds, precious stones and real
property.

There was an attempt to reintroduce it in 2006 but the Parliament of Kenya shot the
motion down. The Parliament later moved a motion in 2014 to reintroduce it and it
therefore took effect on January, 2015. Previously, only stamp duty was levied during
the transfer of real property while developers and landlords would pay income tax
when they disposed property either selling or the leasing of a property, (Mutemi,
2015). This research paper will look in depth to find out the role and contribution of
Capital Gains Tax in Kenya and to its economy after its re-introduction.

2.3. Capital Gains tax models

There are several models of capital gains tax and they include; Accrual-based model
and realization – based model. These models are discussed in detail below.

2.3.1. An Accrual-based capital gains tax

An accrual based capital gains tax assesses the gains made on an assets value over a
specific period of time, mostly annually. The gains assessed are indexed to offset
inflation so that only the real economic gain is taxed. Under accrual method, the tax
liability is levied regardless of whether the asset is disposed or not. The decrease in an
assets value would be treated as a deductible loss and immediately offset against other
income or carried forward within the same tax regime, (Burman, 2009).

7
Accrual taxation substantially increases the tax revenues and consequently increasing
revenue. Advantages of this tax model are that; the taxation is a close approximation
of economic income and also it is neutral in nature to investment decisions if applied
to all assets at the same rate as other forms of tax, (University of Victoria, Wellington,
2009). Another advantage is, there is no incentive to bring forward losses and defer
gains. Lastly, there is more revenue generation potential in this model of tax.

However this tax model has a drawback; it may create liquidity problems for
shareholders who may realize substantial gains but not realize dividends in the event
of sale of a real property. But (Burman, 2009) provides a solution for this through
payment of annual tax. Companies or individuals would pay tax on annual changes in
market value at the highest income rate. Another drawback is regular valuations of
assets which require resources that might not be always available and lastly, that the
perception of such a tax is unfair, (University of Victoria, Wellington, 2009).

2.3.2. A Realization-based Capital Gains Tax

This form of tax model taxes the gain in an asset’s value when the asset is being
disposed. In this case, the taxpayer is able to fund the tax liability and again, the
taxation is based on the market value of the property. A realization-based Capital
Gains Tax is easy to understand and it also has the benefit of not creating cash – flow
issues as the tax liability becomes viable on sale of the property. This model of tax
allows gains and losses to be assessed and taxed.

Realization based capital gains tax prevents taxes from forcing the dissolution of
family-owned businesses, gains on businesses and farm assets that could be carried
over at death of the taxpayer, although it doesn’t prevent the ‘lock-in’ problem. The
disadvantages of this form of tax are that, firstly, taxpayers may be locked-in, where
an owner defers the sale of an asset and bring forward the sale of depreciating assets.
Secondly, losses from capital assets can offset against income and therefore taxpayers
may choose to sell depreciating assets to reduce future tax liability, (E & White.I.E,
2003)

8
2.3.3. Common problems to both models
Both Accrual based capital gains tax and realization based capital gains tax models
have substantial design issues that needs to be addressed. They include; problem of
double taxation and exemptions for owner occupied housing.

a. Problem of double taxation

The concerns on implementation of capital gains tax leading to double taxation since
besides payment of income tax; capital gains tax is also levied on the same property.
The accrual based tax however has countered double taxation and provided relief
where a specific percentage is not considered by the tax authorities of the country of
residence of foreign investors. However, the problem of double taxation on the same
property still remains a bone of contention between tax administrators and tax payers
and this remains a crippling factor towards growth of revenue and the economy of a
country.

b. Exemption for owner -occupied housing

The expected principle is that every real property should be included in the capital
gains tax base. However, there are issues related to owner-occupied housing and that
includes the concern on exemption of primary residence is that it causes a bias
towards investment towards one’s home in comparison to other forms of investment,
particularly where land is speculated to rise in value, (Okeyo, 2016). There is however
a roll over relief, where payments of taxes in a certain asset if proceeds from the sale
of a previously owned asset is used or re-invented in the purchase of a real property.
This roll over relief reduces the lock-in effect experienced by the owner-occupied
property who would want to sell their existing homes to get new ones.

2.4. Roles and Contributions of Capital Gains tax to the real property market

In order to overcome deficits in the budget, the government has had to look for ways
to contribute to the pool of revenue sources and the reintroduction of Capital Gains
Tax in Kenya has broaden the investment areas such as the real estate sector, thus
increasing supply and reducing cost of capital to new and available entrepreneurial
firms, therefore creating jobs, attracting investors into the market, eventually
increasing the levels of economic growth in the country, (Young, 2012).

9
However, (Grubel, 2014) claims that Capital Gains Tax has reduced returns on
investment opportunities in the real estate sector and has consequently distorted
decision making by individual investors and companies. Capital gains tax is taxed on
a realization basis in Kenya. This tax the gain of a property during the disposal of the
property and through this, the owner is able to fund the tax and the property sold is
sold at the market price.

Entrepreneurship in real estate plays an important role in economic growth. However,

(Baumol, E, Litan, & Schramm, 2007) claim that avoiding erroneous taxation in this
form of entrepreneurship could lead to a productive investment. Their discussion
about erroneous taxation does not necessarily mention capital gains tax but it is one
tax that could be particularly erroneous to entrepreneurs. Some view it as double
taxation since stamp duty is already being imposed on the transfer of property. Capital
gains tax imposed on the gain by an individual during the transfer can be seen as a
means of crippling the investment.

There are notable effects of capital gains tax on the real estate market by (Gentry W.
M., 2016). First; Capital Gains Tax can affect an investor’s portfolio decision
especially with the timing of the sale of the asset with the capital gains and
consequently, it can cause a lock-in effect by which investors delay the sale of assets
with gains. Secondly; Capital Gains taxes affects the measure of risk-taking during
the sale of a property as the measure of losses plays an important role as to whether
capital gains tax encourages or discourages risk-taking. Thirdly, capital gains tax can
affect the decision-making process of a firm’s investment by affecting the cost of
equity capital.

Contribution of capital gains tax on real property reflects average income ratios and in
high income countries, it would yield a collection potential of 2.9 percent of Gross
Domestic Product, GDP, whereas in middle income countries like Kenya, a lower rate
is realized of 0.9 per cent of GDP. A benchmark can be done however to realize
untapped revenue potential from property tax in many countries, (Norregard, 2013).
The significance of capital gains tax is progressively being realized in the real
property market in different countries, besides facing challenges in implementation
and negative gearing towards this form of investment, gains taxed have contributed
continuously towards growth in revenue and consequently, the economy in general.

10
2.5. Challenges facing implementation of CGT

The capital gains tax discourages the capital gains realizations because capital gains
are only taxed when realized. This causes a lock-in effect, where taxpayers tend to
hold on to appreciate assets they would otherwise sell. Consequently, step-up in basis
at death gives taxpayers an incentive to hold assets until death and pass them to their
heirs, (Kahi, 2016). Holding of suboptimal assets and portfolios or forego investment
opportunities to forego higher pre-tax returns imposes efficiency losses, this affects
realizations and tax revenues. Taxpayers delaying disposing off their large gains avoid
hefty tax-hits. As a result, people hold assets too long and forgo beneficial
diversification opportunities.

In an analysis of active business assets types of assets that are likely to be associated
with entrepreneurs play an important role of portfolio aggregate assets like household
assets. The rate of Capital Gains Tax therefore determines the willingness of
entrepreneurs to disburse their capital in these business assets. The reintroduction of
CGT in Kenya has therefore reduced the ability to take risks amongst entrepreneurs
on the thriving property industry and also considering the more gain accrued during
transfer, the more tax entrepreneurs are expected to pay (Gentry, 2016).

The reintroduction of the capital gains tax by the parliament through the Finance Act
2014 was hurried. There wasn’t enough time to consult on the information gap that
existed between the suspension in 1985 and the reintroduction of this form of tax. For
example, Compensation tax was introduced to cover the gap caused by the capital
gains tax. It is the tax on the distribution on the untaxed income. It should have been
done away with once the capital gains tax was reintroduced avoiding multiple
taxations.

Proper documentation of historical transactions proving historical costs and adjusted

mostly lies on the owner or the eligible taxpayer. Loss of these documents may prove
to be a snare in case a taxpayer wants to prove the need for compensation of
exemptions during the disposal of the property. Other factors that come into play
during the compensation of the owner for adjusted costs include; some properties in
the family have existed for decades and information of all the transactions for
purposes of compensation may not be easily accessible or don’t even exist. Secondly,

11
during the suspension of the capital gains tax, transfer of properties and portfolios
then may have not been documented to enhance the increase of value of the property.

The level of awareness of Capital Gains Tax in Kenya has also contributed to the
challenges affecting the implementation by the Income tax department and the KRA
as whole as the legal bodies for administering tax. A previous study by (Kahi, 2016)
indicated that the level of CGT has greatly contributed to the challenges affecting its
implementation considering most property owners have little information on CGT.

The taxation of gifts has also been a bone of contention as no guidelines have been
provided in the Eighth schedule of the Income Tax Act concerning the taxation of real
property transferred between family members as gifts. Whereas the schedule provides
exemptions for transfer of property of the deceased but it doesn’t provide exemptions
for transfer of gifts. The nature of transfer of gifts gives no consideration to the
transferor since there is no gain or loss in the transfer. Taxation of gifts has therefore
brought proposals of exemption of taxing a gift that is meant to be enjoyed by the
recipient from the donor.

Another implementation challenge of capital gains tax in Kenya is the problem of

indexation. Paragraph 2 of the Eighth schedule does not provide guidelines for
indexation which may result in problems to taxpayers who may not be able to prove
transaction costs for the sake of adjusted costs and exemptions. The increase of value
of property is eroded by the inflationary changes year- on-year. Therefore, capital
gains tax should aim to charge only the actual gains arising on the property by the
adjusting on the change of value and eventually eliminating the inflation effect on the
value. Failure to do this can cause inequity through inflationary change.

2.6. Real Property Taxation in Kenya

2.6.1. Introduction

Real property tax can only be understood when the complexity of the Kenyan tax
system is simplified. (Waris, 2007) Explains that the tax system in general is a
complex affair and it narrows down to several aspects that define tax law. Among
these aspects that directly affect the tax system in Kenya is the fact that the poverty

12
line is of a significant margin. Secondly, the legislations that define the country’s tax
law must be dated back to the pre-colonial practices, among others. The tax system
can be informed in regard to: the volume of tax collected, composition of the tax,
rates of taxes to be imposed, the timing of the collection and the mode of collections.

The administration of land tax took ground first in 1908, (Waris, 2007) under the
Crown Land Bill presented by the East Africa Protectorate. It was the first basis of
legislation on tax over land on individual holdings and was considered as a sound
basis for land policies in East Africa. This legislation defined most policies on land
tax systems in Kenya; however, it was later rejected by settlers because they felt the
tax imposed on them was ridiculous since owners of land of over a hundred thousand
acres were taxed daily. It is safe to say the new day petitions over negative effects of
some forms of tax imposed on real property are not only influenced by our forefathers
who were compelled to seek justice over the unfairness brought by some taxes but
also the fact that some taxes are not necessary, to say the least.

The Rating Act allowed and still allows local authorities to tax either land or land and
improvements which include buildings and other structures erected on vacant land.
The first application of Rates was in Mombasa in 1921 (Ministry of local Authorities,
2001) and it was based on land and improvements. All property rates were levied on
land alone and exclusive of improvements. Any unregistered public land either
belonging to the national government or the council trust land, was excluded from the
private valuation roll prepared to help administer and define property rates.

With an already established system of collection of property tax by the local authority,
the responsibility of these local authorities is to; maintain the tax roll, valuation and
this is either by local council valuer or an outsourced valuer from the private sector,
assessment of tax, bill collection, enforcement and tax payer services. However,
(Milwida, 2003)suggest that the revenue basic information is incomplete, collections
are low, enforcement is virtually non-existent, weak administration combined with a
weak political will has decreased revenue collection in Kenya for many years. The
reason for weak collection and enforcement of tax is attributed to; lack of taxpayer
confidence in the tax for example Capital Gains Tax, lack of legal and administrative
collection and enforcement mechanisms and perhaps the political will of those in
power.

13
2.6.2. Types of Real Property Taxes in Kenya

Local governments are generally vested with powers to impose taxes. Real property
tax to be specific is imposed on immovable property such as land, buildings,
improvements and machinery (Milwida, 2003). Properties exempt from paying these
taxes are mostly real properties owned by the government, charitable organizations,
churches, cooperatives, and those that are used in supply of services such as water and
electricity. The rates of these real property taxes are only a fraction of the base value
or the market value of the land.

Types of real property taxes levied in Kenya include; stamp duty, land rates, land
rents and premiums, capital gains tax and inheritance tax (Syagga, 2015). Stamp duty
is revenue levied by states on various types of transactions such as transfers and
agreements for the sale of real estate also referred to as transfer duty, documented
gifts, and policies of insurance, mortgages and hire of goods for rental. Stamp duty in
Kenya is collected by the Ministry of Lands and a regulation for the administration for
this form of real property tax is provided by the Stamp Duty Act Chapter 480. The
legal framework stipulates on how the duties are to be paid, how instruments are to be
written and stamped, instruments to be separately charged in certain cases among
others.

Land rate is a local tax that depends on the location of the property and is taxed
according to the market value of the land. Value of land increases as it is serviced
with good roads, water, sewage system, street lights and other security systems. Form
of rating includes improvement rates, capital value and annual value rating.
Improvement rates apply to the value of improvements only without land, and this
applies only in Tanzania but yet to be applied in Kenya (Syagga, 2015). Capital value
property tax uses market value of the property for assessing tax liability and Annual
value which is also called ‘rental value’ is based on net annual rent derived from gross
annual rent outgoings; maintenance and management costs. It is applicable whether
rent is realized or not in any particular year.

Land rents and premiums arise from proceeds of alienation or sale of public land
which is vested in both the National and county government by the constitution but it
is to be administered on behalf on their behalf by the National Land Commission. The

14
current practice in Kenya is to obtain the market value of the Land and ask the allotted
to pay 20% of the value as stand premium and 4% thereafter an equal amount to 4%
of the value as ground rent for the period of the lease (Syagga, 2015).

Stamp duty is also another form of tax that is imposed on transfer on any property. In
this case, before any transfer of real property, the Kenyan constitution under Stamp
Duty Act chapter 480 requires any transferee to pay stamp duty as tax within a period
of 30 days after the execution of the transfer. The law stipulates under the Stamp Duty
Act that the transferee has to obtain a payment authorization slip from the Kenya
Revenue Authority iTax system then proceed to make payments. The current stamp
duty rates are 4% for the lands within municipalities or in other words leaseholds and
2% for lands outside municipalities or freeholds.

Inheritance tax also known as estate tax and death duty is paid by the personal
representatives of the deceased or beneficiaries of the estate. Estate tax is used in
Kenya rather than Inheritance tax. The law that dictates the administration of this tax
is the Estate Duty Act, Chapter 483 of the laws of Kenya. Payment of stamp duty is
contingent upon the transfer of property after the death of the previous owner. The
Estate Duty Act provides impositions providing the basis of payment of this form of
property tax.

Capital gains tax is also a property tax practiced in Kenya and is imposed on
chargeable gains from disposal or transfer of property. It is applied when profits are
realized by an investor or a corporation during the transfer of the property. The
chargeable gain is the profit realized when the disposal price is more than the
purchase price of the asset being transferred. Capital Gains Tax is levied at 5% in
Kenya.

a. Role of Property Tax in Kenya

The major case put forward in relation to role of property tax in Kenya is purely its
contribution to the revenue collected to meet local needs. It is already established
those that benefit most from public investments will likely pay a larger share of the
tax. Land taxes can capture the part of increased land values that often result from
public investments and improved public programs, so it is safe to say, increased
public investments increase the tax supposed to be collected and therefore

15
contributing to meeting a good share of the local needs in the country though
allocation of revenue collected from tax.

Land is captured as an economic commodity in the local culture and individual

ownership is accepted and therefore the government is given the mandate to seize and
sell land just in case property tax is not paid as per policy. Therefore, under this light,
property tax has contributed to local cultures under individual ownership as a basic
human right and consequently compelling owners of land to be responsible tax
payers. A national taxpayer is therefore necessary in this case (HABITAT, 2011). If
this is achieved then, the importance of creating fiscal cadastres becomes a priority
and urgent since rights and responsibilities of owners of land is now established and
results in public registration and enforcement of these rights by the judiciary. The
creation of these fiscal cadastres will eventually be helpful in solving land disputes
and recognizing each owner’s responsibility of payment of land tax, besides providing
job opportunities to land economists and land surveyors.

Besides increase in revenue collection and fiscal cadastre formation, property tax
contributes in defining tax base through change in market conditions. This is so in the
sense where real estate markets are active and information of market transactions is
available therefore, valuation approaches based on capital market value, annual rental
value or an approach tied closely to market transactions should be used to establish
the tax base (HABITAT, 2011).

2.6.3. Background to Capital Gains Tax in Kenya

Capital gains tax is imposed on chargeable gains from disposal or transfer of property.
It is applied when profits are realized by an investor or a corporation during the
transfer of the property. The chargeable gain is the profit realized when the disposal
price is more than the purchase price of the asset being transferred. (Gulati, 1957) has
categorized incomes from capital gains as Short-Term Capital Gains or Long-Term
Capital Gains. Short term capital gains are realized from holding a property of a
period less than one year between the acquisition date and the disposal date. Long
term capital gains are gains realized from holding a property for a longer than a year
between the acquisition date and the disposal date. Short term capital gains have a
tendency of attracting higher rates compared to long term capital gains.

16
Capital Gains Tax however has experienced reduction motions more often than not.
Analysts according to (Hungerford, June 18, 2010) argue that reductions in this tax
rate proposed as a policy foresees the increases savings and investment by the
taxpayers and therefore provide a short-term economic stimulus, consequently, a
long-term economic growth. This however, has an effect on decrease of public saving
and may little effect on private savings.

a. Revenue justification

One of the justifications for capital gains tax is revenue collection. Revenue collection
benefits different services such as health care centers and public services. This
supports economic growth of a country or state both in the short run and in the long
run. Total revenues collected from increase in revenue from capital gains tax, property
transfer taxes and taxation of immovable property has as well significantly
contributed to the increase of total revenue for both central and local government as
well as the GDP, (Jibao, 2016).

b. Adjusted Capital Gains Tax Rate

Rates adjusted for capital gains tax have an effect on the increase or decrease of
revenue for both local and central governments. (Hungerford, June 18,
2010)Describes a situation called ‘lock-in effect’ where taxpayers hold appreciated
assets instead of selling them. This furthermore gives taxpayers incentives to hold
assets until the point of death and then pass them to their heirs. This effect leads to
losses as investors may be encouraged to hold suboptimal portfolios or forego
investment opportunities with higher pre-tax returns. Changes in tax returns therefore
tend to track capital gains realizations and this shows the decrease or increase in
capital gains realizations. Adjustment of tax therefore has either a positive or
negative effect on the revenue collected.

c. Capital Gains tax on non-residents

The disposition of an asset in a taxing country has laws that govern the process and
the legislative procedure includes both residents and non-residents. The principle of
equivalence according to base on capital gain and income has been used to justify
taxing non-residents on paying taxes in the event of disposing immovable property,
better described as real property, in the taxing country, (Cui, 2014)

17
For example, in Kenya, a non-resident in the event of a transfer of property is obliged
to pay 5 per cent of the gains accrued. This however can be challenging when
administering this form of taxation on non-residents as it can beg the question on the
justification on the resources required to enforce this form of tax relating it to the
revenue acquired during the transfer. On the bright side, there are legal strategies to
allow tax avoidance by non-residents and they can be identified easily.

2.6.4. Property Taxation Legal Frameworks in Kenya

The Kenya Revenue Authority has prioritized compliance on payment of taxes. There
are therefore several Acts of parliament that provide legislations on taxation of real
property in Kenya. They include; The Stamp Duty Act, the Income tax Act, Valuation
for Rating Act, The Rating Act and The Land Registration Act.

However, the principal legislation governing administration of Capital Gains Tax in

Kenya is the Income Tax Act Cap 470 Eighth Schedule Section 3(2) (f). This is
supplemented by the provisions of The Finance Act 2014 and The Finance Act 2015
which brought amendments to the afore-mentioned act. This research will address The
Stamp Duty Act Cap 480 and the Eighth schedule of the Income Tax Act that
provides legislative procedures for administering Capital Gains Tax.

a. The Stamp Duty Act Cap 480

The stamp duty act makes provisions for management and levying of stamp duties
and purposes connected there with and incidental thereto. It applies to all stamp duties
and to all fees and penalties which are to be collected and received by means of
stamps under or by virtue of any written law, (The Republic of Kenya, 2015).Failure
to pay additional stamp duty, the collector of stamp duty upon issuance of a notice to
the purchaser for additional stamp duty will register caveats or restriction against the
title of immovable property.

b. The Income Tax Act Cap 470 Eighth Schedule

The legal provisions of administering Capital Gains Tax in Kenya are included in The
Eighth schedule of the Income Tax Act Cap 470. It is supplemented by provisions in
The Finance Act 2014 and The Finance Act 2015 that provided amendments to the
aforementioned Act. An amendment of this act covers sectors such as Mining, Stock

18
market, and Property. However, the main focus of this research project is on real
property market and the contributions of capital gains tax to this investment sector.

The provisions of this Act dictate that any gains accrued after the 1 st of January, 2015
on the transfer of real property, is bound to taxation at the rate of 5 per cent whether
or not the property was acquired before 1 st January, 2015. This includes properties
situated in Kenya only. Property transactions that are exempt from CGT include
among others disposal of property to administrator the estate of a deceased person, the
vesting of property to a liquidator, and the selling of individual residence occupied by
the seller for at least 3 years before the transfer and transfer of assets between spouses
and former spouses and their immediate family.

The Kenya Revenue Authority gave provisions for payment of Stamp Duty and
Capital Gains Tax through the iTax platform as from 1 st October, 2016, (iTax is an
online platform used in payment of taxes). It was fully implemented on the 30th of
January, 2017. Its stipulations are that capital gains taxes must be paid before property
is transferred simultaneously with the payment of stamp duty; previously, capital
gains tax was paid before the 20th of the month in which the transfer was done.

Required documents and certificates

The Kenya Revenue Authority for purposes of audit and compliance has provided the
transferor procedures and documents for effective administration of tax. These
documents include;

 Title Deed
 Sales agreement
 Documents in support of costs
 PIN of parties involved in the transfer
 Returns, records and declaration of stamp duty payments may be required for
reconciliation purposes

19
Taxable gain computation

When a transfer is done, and there are no exemptions included, the chargeable gain
which is the difference between the transfer value and adjusted cost is taxed at 5 per
cent. Below is a breakdown of the general computation of capital gains in Kenya;

Transfer value

Sales proceeds - Incidental costs (sum of legal fees, advertisements, agent’s

commission, valuation fees) = Transfer Value

Adjusted Cost computation

Cost of acquisition + (Legal cost of acquisition + Maintenance costs + Valuation Fees

+ Defending title costs - Income Based Deductibles) = Adjusted cost

Gain Computation

Transfer value – Adjusted cost = Chargeable gain

Chargeable gain * Tax @5% (CGT) = Tax remitted.

20
2.7. Capital Gains Tax practices in other countries

2.7.1. Capital gains tax in Nigeria

Capital gains tax was introduced in 1967 in Nigeria through the Capital Gains Tax
Act and took effect on 1st April 1967. Capital gains tax is chargeable at 20 per cent of
the gains accrued during the transfer of property located within the boundaries of
Nigeria. Capital gains represent the excess of disposal proceeds over the cost of the
property. Capital loss is not deductible on the capital gains during the disposal of
property.

Payments of capital gains in Nigeria can apportioned into installments over a period
exceeding 18 months, the chargeable gain can be apportioned in to the affected
assessment years in proportion to the number of installments payable in each of the
years. Capital gains are assessed on current year basis which means the preceding
year basis is not applicable.

Real property devolving in the case of death and later sold is bound to consideration
in taxation for capital gains. This is in the case where property under the will of a
deceased person for purposes of capital gains is deemed to be disposed of by him at
time of death and acquired by a personal representative can be allocated with this
consideration equal to the bargain made at arm’s length (Adeyemi & Ashaye, 2012).

Roll over relief applies in the case an individual or a company or any other eligible
taxpayer decides to dispose an eligible business asset and decides to replace it with a
new asset in the same category of the sold asset, is bound to deduct the capital gain
accrued in the disposal from the cost of the new asset thereby postponing the payment
of CGT on such a gain. In the case where the amount is reinvested in an asset of the
same category as that of the sold asset is less than the full sale proceeds, the
chargeable gain is allowed a deduction from the cost of the new asset and will be
limited to so much of the capital gain reinvested.

a. Assessment of CGT in Nigeria

This assessment of capital gains tax in Nigeria highlights a few grounds the
implementation and the administration of CGT has taken on property tax and they

21
include; the capital loss on any disposal of any asset is not deducible from capital
gains on disposal of any other asset even if both are of the same type, in the event of
apportionment of payment by installments over a period of 18 months, the chargeable
gain shall be apportioned to the affected assessment years in proportion to the amount
of installments payable in each of the years.

Chargeable gains are assessed on a ‘current year’ basis and that means the preceding
years do not apply in this assessment. Normally, it is the preceding year basis that is
applied as companies do not submit CGT computations until the time they submit
their respective income tax computations.

Roll-over relief is available to any company acquiring a new asset to be used for the
purposes of the trade in replacement of an old one. Roll-over relief allows for the
deferral of capital gains tax due on the disposal of certain qualifying assets used in a
trade, as long as the proceeds of the disposal are fully reinvested in new qualifying
assets for the trade. This aspect might be of interest to companies as there could be
immense benefits accruing to any company claiming the relief.

Gains arising from transfer of property in form of a will by a deceased person to

personal representative or other persons on whom the assets devolve to shall not be
subject to CGT but any subsequent disposal by the person on whom the property
devolves on death will be subjected to CGT. The acquisition price to him will be the
amount for which the property devolves on the death of the owner.

These lessons would be recommended for purposes of benchmarking in the process of

developing a more established policy for capital gains tax in Kenya.

2.7.2. Capital Gains Tax in Australia

Australia as taxing country had a comprehensive Capital gains tax regime which was
introduced since September 20th 1985. Capital gains tax is considered as the
difference between what it cost you to purchase an asset, in this case real property and
what you receive when you dispose it. Realization basis as used in other countries is
used in payment of capital gains tax in Australia. Taxing authorities in Australia
allowed indexing using Consumer price index and this applied to properties that were
held for more than one year and did not make any loss. 20 per cent was used to

22
calculate capital gains tax using average method and included the person’s net capital
gain in calculating the average tax rate one would apply.

All assets held for at least one year were chargeable at a tax rate of 50 per cent and
were excluded from capital gains tax. This meant that the effective tax rate for long
term held assets had been slashed by half. The Income tax rate was at 46.5 hence the
highest payable capital gains tax stood at 23.25. Any losses made on sale of property
can be offset by capital gains made and not with any other source of income.

Several capital gains are exempt from tax and they are: gains on principal gains on
assets acquired before 20 September 1985, when Capital Gains Tax was first
introduced in Australia. Rollovers are allowed for certain gains, including on assets
transferred at death, as a result of a court-ordered divorce decree, and when a
company is acquired in exchange for shares in the acquiring company. Gifts of capital
assets trigger a realization of gain for tax purposes to the donor (Burman, 2009).

Roll over relief

This allows for a deferral of a capital gain or capital loss until a later capital gains tax
transaction. In the case of a divorce and there is a division or transfer of property
between the two parties, either persons will not be taxed until a later date where either
of the parties decide to sell the properties, then at that point, this transfer or disposal
will demand a tax imposition. Roll over relief also applies to events of loss,
destruction or compulsory acquisition of a property, where there is room available for
deferring any of tax implications of the beneficiaries to future transaction by the then
owner.

Methods of capital gains tax calculations

There are three main capital gains taxation in Australia and they include; Indexation
method, discount method and the ‘other’ method. Indexation method is applied when
the capital gains are realized on the property that you have owned or acquired before
11:45am (by the legal time in the Act) and in the other case is if you have owned the
property for 12 months or more. Discount method used a discount rate of 50 per cent
which is used to reduce the capital gain. It reduces currently realized gains and can
only be done when all the capital losses have been deducted and may need offsetting

23
from the current income year and any unapplied net capital losses from earlier years.
The ‘other’ method is applicable where the property that was acquired was disposed
within 12 months of its acquisition. This involves subtracting the cost base from the
gross gain.

a. Assessment of CGT in Australia

Capital gains are taxed under consumption tax in Australia, but others argue that
capital gains tax should be taxed under concessional status under an income tax.
Under a pure ‘Haig-Simons’ income tax theory, capital gains tax would be taxed as
ordinary income as it accrues, like interest payments, not as realized, because the
increase in asset value represents an accretion to wealth. Accrued capital losses would
be immediately deductible, for the sake of consistency and inflation purposes, income
and expenses would be indexed. Hence only the real gain or loss on the asset should
be included in income.

Interest income would also be indexed, so that only the excess of interest above
inflation would be deductible. It is important because otherwise, the taxpayer would
gain pure arbitration profits by deducting normal interest while recognizing real gains
and increase inflation which would offset an unstable market condition.

24
 CHAPTER THREE

RESEARCH METHODOLOGY

3.1. Introduction

This chapter outlines the research design and the methodology of the study. It
examines in detail the research methodology and design, the target population,
sampling framework, sample size, data collection procedures and data processing
analysis approach.

3.2. Research Design

Research design is the arrangement of conditions for the collection and analysis of
data in a way that results to combine relevance to the research with economy in
procedure, (Kothari, 2004). It is, in simple terms, the procedure upon which a research
is carried out and it also includes an outline of what the researcher will do. Design
decisions that will be made include; what the study is about, why the study is being
carried out, where the study will be carried out, what can the required data be found,
what periods of time will the study include, what will be the sample design, how will
the study be analyzed and in what style will the report be prepared.

This research will cover parts of sampling design, observational design, statistical
design and operational design. With that in mind, the researcher ensured to employ
the considered expected characteristics of a research design which include; flexible,
appropriate, efficient, economical, and reliable with minimal bias. To answer the
research problem of this study, the research design considered factors such as means
of obtaining information, skills of the researcher, objective and nature of the problem
to be studied and the availability of time and money for the research work; so as to
give a comprehensive conclusion for the research that is able to add to the pool of
knowledge in this area of study, (Kothari, 2004).

There are major and important concepts relating to research design and they include;
dependent and independent variables, extraneous variables, control, confounded
relationship, research hypothesis, experimental and non-experimental hypothesis-
testing research and experimental and control groups. The concepts relating to this

25
study is to study the extraneous variable that affects the implementation of CGT on
real property in Kenya.

There are different research designs that can be conveniently described if categorized
as; research design in case of exploratory design studies, research design in case of
descriptive and diagnostic research studies and research design in case of hypothesis-
testing research studies, (Kothari, 2004). The research design relevant to this is an
exploratory research study; which formulates a problem for more precise investigation
or of developing the working hypothesis from an operational point of view. This
research design is flexible enough to provide opportunity for considering different
aspects of a problem under study.

The general context for the exploratory research design is to do a survey of

concerning literature; which is the most simple and fruitful method of formulating
precisely the research problem and experience the survey which means to survey the
people who have had practical experience with the problem to be studied. In this case,
the researcher will have to go and collect data from professionals in the field who
have personally encountered challenges facing the implementation of CGT on real
property in Kenya, (Kothari, 2004).

3.3. Geographical scope of study area

The researcher chose Nairobi County as a case study for this research project. A case
study entails the detailed and intensive analysis of a single case. It is associated with
location, a community or an organization. Nairobi County in brief is the smallest yet
the most populous of the 47 counties in Kenya with a population of 3,375,000 people
by 2009 and with a total area of 696km 2, Wikipedia (2017). The county has
experienced one of the most rapid growths in urban centers and this compelled the
researcher to base his study here, considering it is also the country’s business hub. It
is expected to host most of the transfers of properties which will be very relevant to
this research project.

3.4. The Population

A population is any collection of specified group of human beings or non-human

entities such as objects, educational institutions, time units, and geographical areas,

26
prices of wheat or salaries drawn by individuals. Population can further be
categorized into finite, infinite, existent population and hypothetical population. Finite
population is a population containing a finite number of individuals, members or
units. Infinite population is a population with infinite number of members for example
the population of pressures at various points in the atmosphere. Existent population,
which defines the population of this research, is the population of concrete individuals
that directly affect the statistic (Koul, 1984).

Existent populations of this study are; conveyancing lawyers, estate agents, valuers
and tax administrators (KRA); the above list of population defines the sampling
frame. It is essential for the researcher to make an up-to-date population listing for
purposes of accuracy in collecting information relevant to the research project (Koul,
1984).

It is best to observe that the conveyancing lawyers are the professionals best placed to
approach in collecting information on the transfer of properties since they are the ones
that handle most transfers as they are involved in preparing legal documents as well as
payment of property taxes such as capital gains tax and stamp duty. Valuers are also
an important target population as they handle valuation of properties for purposes of
transfers for various purposes. They are also best placed to approach since the buyers
of these properties may not be willing to divulge much information towards this
research.

It also important to point out that the estate agents’ main role is to identify buyers and
then prepare letters of offers for the sale. Once these offers are signed by the buyer,
the conveyancing lawyers take up the transaction and carries on with the process of
transfer. Therefore, the conveyancing lawyer is best placed to provide information
more than the estate agent.

3.5. The Sample

It is impossible if not impractical to test, interview or observe each unit of a

population under controlled conditions in order to arrive at principles having universal
validity, (Koul, 1984), therefore a sample has to be selected to represent a population.
A sample is an analyzed representative of a target population. Sampling on the other
hand is the process by which a relatively small number of individuals or measure of

27
individuals, object or events is selected and analyzed in order to find out something
about the entire population from which it was selected.

The population is inclusive of; conveyancing lawyers, estate agents, valuers, tax
administrators (KRA. Research for the total population of each category comprised
of; 17 conveyancing lawyers, 265 registered Estate Agents in Nairobi ( (Axis, 2017),
300 registered Valuers ( (Axis, 2017) and 23 tax administrators. Out of this
population, a sample will be determined using the most suitable technique that will
favor efficient collection of data.

With the population listing, a good sample must be as nearly representative of the
entire population as possible and ideally it must provide the whole of the information
about the population from which the sample has been drawn, (Koul, 1984). The
researcher has to therefore select a sampling technique that will meet the above
recommendations on sampling.

3.5.1. Sampling technique

The adequacy of a sample will depend on the method used in drawing the sample,
(Koul, 1984). Methods of sampling include; Non-Probability sampling and
Probability sampling. Non-probability sampling is based on a specific group. Units in
non-probability sampling are selected at the discretion of the researcher and such a
sample derives control from the judgment of the researcher. Examples of non-
probability sampling include; Quota sampling where population is divided into
relevant strata; Convenience sampling, the researcher uses captive sampling or
volunteer samples; Purposive sampling targets a group of people believed to be
reliable for the study.

Probability sampling is based on using random methods in selecting the sample. In

this method of sampling, the units of the population are not selected at the discretion
of the researcher but by means of certain procedures which ensure that every unit of a
population has one fixed probability of being selected in the sample. Probability
sampling methods include; simple random sampling, stratified random sampling,
system random sampling and cluster random sampling.

28
In simple random sampling, each member has equal chance of being selected and the
researcher can obtain a list of all members. Stratified random sampling divides the
population into homogenous groups then selecting a sample out of each group.
Systematic random sampling employs interval sampling especially when the
researcher has a large list of people to select from. Cluster sampling is used when the
population under study is infinite or a list of the units of the population does not exist,
(Koul, 1984).

The researcher with thorough analysis opted for stratified random sampling and
simple random sampling. The choice of the sampling method was dependent on the
consideration that this research is unique and other methods may not apply.

Simple random and stratified random sampling

Simple random sampling applies to this research since it will allow the researcher list
all the possible members of the population and out of that list that exhausts every
possible member, the researcher will apply stratified random sampling considering
there is a chance of undue proportion of one type of unit in the population and
therefore it is necessary to make certain that units in the sample are selected in
occurrence to the proportion to their occurrence in the population, (Koul, 1984).

When the units in a sample are in proportion to their presence in the population, the
sample is considered stratified. In employing this method, the researcher divides his
population into different strata by some characteristic known from previous research
or theories related to the phenomenon under investigation. In doing this, the
researcher draws randomly each stratum of the homogenous groups and in addition to
randomness; it increases precision and representativeness thus reducing bias in
selection of a sample.

3.5.2. Sampling size and its determination

Sample size determination is critical since the research population size is large. The
sampling theory explains the relationship between the population and the sample
drawn from the population. The sampling theory helps in estimating the statistical
estimation and inference. Sample size is denoted as ‘n’ and the objective is to
determine whether the researcher requires achieving a large or a small sample size.

29
However, if we choose too small a sample size, it may not serve to achieve the
intended objective and if the sample size is too big, we may incur huge costs and
more resources will be required, (Kothari, 2004).

Through a thorough research and directly acquiring information from the different
departments hosting the respondents, the researcher came to a conclusion of the total
population of each category. The categories of respondents and their population sizes
are illustrated in Table 3.1.
Table 3. 1 Respondents and their population sizes

Category Population Size

1. Estate Agents 265

2. Valuers 280

3. Tax administrators 23

4. Conveyancing Lawyers 45

Total Population 585

The sample size will be calculated using the total size of the population. The
researcher applies the David Nachmias and ChavaFrankfort Nachmias formulae for
sample size determination as shown below, (Nachmias & Nachmias, 2014).

( z × z ) ( p × q) ( N )
n=
e ×e ( N −1 ) + ( z × z )( p × q )

Where; n = sample size

Z = standard deviation (1.96)

P = % target Population (95% confidence level)

q = (1-p) (0.05)

30
 N = Population size (585)

e = Confidence interval (Margin of error=0.05)

n= (1.96 * 1.96) (0.95 * 0.05) (585)

(0.05 * 0.05) (585– 1) + (1.96 * 1.96) (0.95 * 0.05)

n= 65

The total sample size is 65.

Allocation of sample size to respondents

Using sampling quotient (n/N) where the sample for each category of respondents is
determined by dividing the population of each category by the total population and
multiplying it to the total sample size (Walliman, 2011). The researcher however
adjusted the sample sizes to allow sizeable numbers of each category for efficient
collection of data and retrieve adequate data. Table 3.2 illustrates the sample sizes for
each category
Table 3. 2 Respondents and their sample sizes

Respondents Sample Size

Estate Agents 25

Valuers 27

Tax administrators 7

Conveyancing Lawyers 6

Total Population 65

31
3.6. Data Collection

While deciding on the method of data collection, the researcher kept in mind the two
types of data; primary and secondary data. The study used both. Primary data is data
that has been observed, experienced, or recorded directly from the source which can
be done through direct communication. The methods of collecting Primary data
include; observation method, interview method, through questionnaires and use of
schedules among others, (Kothari, 2004).

Secondary data on the other hand is data that is already available; data that has been
collected and analyzed by someone else. Examples of these secondary data include
various publications of the central, state or local government, publications by foreign
bodies and their subsidiary organizations, books, magazines and newspapers,
technical and trade journals, reports and publications of various associations like the
Institution of Surveyors of Kenya (ISK) connected to this study. It is important for the
researcher to carefully scrutinize the secondary data since it may be unsuitable or may
be inadequate in the context of the problem which the researcher wants to study,
(Kothari, 2004).

This study used questionnaires administered to the respondents relevant to this study.
Considering this study will involve large enquiries, this method was considered most
suitable since there is limited time to acquire information, the cost is low compared
other sources, it is free from the bias of the interviewer, respondents have adequate
time to give well thought answers and respondents who are not easily approachable
for interviews for example at the KRA offices can be reached conveniently using
questionnaires. The questionnaires will be categorized into sections so as to acquire
specific information relevant to the formulation of a conclusion for this study.
Respondents to the questionnaires were; registered and practicing valuers, registered
and practicing Estate Agents, Tax administrators at the KRA who directly deal with
tax compliance in Kenya, conveyancing lawyers who are members of the Law Society
of Kenya (LSK) as they are directly involved in signing transfer papers and are
majorly involved in policy making.

Secondary sources were also adopted such as ISK and KRA journals on real property
tax and CGT to be specific, desk review references were also made to the eighth

32
schedule of the income tax, The Finance Act 2014, The Stamp Duty Act, The Land
Registration Act of 2012 amongst others. In using these sources of secondary, the
researcher considered the reliability of data, its suitability and its adequacy to make
relevant conclusions in the end.

3.7. Data analysis and presentation

Data collected is divided into categories, qualitative and quantitative data, referring
not to their source but to their characteristics, (Kothari, 2004). The quantitative data is
measurable and the researcher adopted use of percentages in the analysis of data
collected from the questionnaires. Immeasurable data, in other words, qualitative data
was used in making subjective judgments in this analysis from the respondent’s
personal views and comments. The collected and analyzed data was expected to
provide answers to the research questions. Analyzed data was tabulated in form of
percentages and frequencies and presentation was in form of tables, charts and graphs.

33
 CHAPTER FOUR

DATA ANALYSIS AND REPRESENTATION

This chapter presents and analyses the findings of this research. The outcomes of this
research were based on the main objective of this research which is determining the
challenges affecting the implementation of Capital Gains Tax on real property in
Kenya which includes; the problems faced by stakeholders in this sector and the role
played by CGT in the land market.
The data analysis and presentation are basically based on responses from the
questionnaires filled by the respondents in respect to the objectives of this study.

4.1. Response rate

The study had a sample size of 65 respondents in total and the researcher managed to
drop at least 40 questionnaires to the lawyers, valuers, estate agents and tax
administrators. The researcher was however able to collect 32 filled questionnaires
that formed the basis of this analysis and presentation. Table 4.1. shows the response
rate.

Table 4. 1 Response rate

Respondents Sample size Response Response

Valuers 27 15 55%
Estate Agents 25 7 28%
Tax Administrators 7 7 100%
Lawyers 6 3 50%
TOTAL 65 32 49%

4.2. General Information of respondents

The general information of the respondents was captured in the first section of the
questionnaire and it included; the position or profession of the respondents, the level
of education completed and the level of experience determined by the duration of
years the professional has been in practice in the specific field.

34
 Out of the 32respondents; 15 were valuers, 7 were estate agents, 7 were tax
administrators and 3 were lawyers. The Figure 4.1 illustrates the proportions of
the positions of the respondents.

Figure 4.1 Profession of the respondents.

Chart Title

9%
Valuers
22% Estate Agents
47%
Tax Adminstratators
Lawyers

22%

4.2.1. Level of education

The analysis from the 32 respondents revealed that; 91% had a Bachelor’s degree
and 9% had Post-graduate degree. The results imply that all the respondents were
all educated and were able to give adequate information to help make a proper
conclusion for this research paper. Figure 4.2. illustrates the information above.

35
Figure 4.2 Level of education

Level of Education

9%

Post- Graduate degree

Bachelor's Degree

91%

4.2.2. Level of Experience

This was determined by analyzing the number of years the professional has
practiced in their specific fields. The research revealed that; 85% have been in the
field for a maximum of 5 years, 12% have been in the field between 6 and 15
years and 3% have been in the field for over 15 years. This analysis is illustrated
in Figure 4.3 below.

Figure 4.3 Level of experience

Level of education

3%
12%
0 - 5 Years
6 - 15 years
Above 15 years

85%

36
4.3. Level of awareness on Capital Gains Tax
This section sought to determine the level of awareness the respondents had on
capital gains tax. The first part of the section was to determine if the respondents
were aware of Capital Gains Tax, the second part was to determine if their clients are
aware of CGT as they transfer property. The third part of this section was to
determine the whether the proper regulatory bodies are creating enough awareness
on CGT in Kenya; the fourth part was to determine which channels were most
appropriate in creating awareness on CGT. The last part was to assess the
adequateness of the available information on CGT.

4.3.1. Level of awareness

The respondents aware on CGT were at 97% while those who were not aware was
at 3%. It is important to note almost all of the respondents were aware of the CGT.
The information is illustrated as in Figure 4.4.

Figure 4. 4 Level of awareness on CGT by Professionals

Level of awareness on CGT by Pro-

fessionals

3%
Aware of CGT
Not aware of CGT

97%

4.3.2. Clients awareness on CGT

This analysis was to determine, in opinion of the professionals, the level of
awareness of CGT by clients. The opinions retrieved were subjective in relation to
this research. The respondents indicated that a good percentage of their clients are
aware of CGT as they transfer property. Clients who were aware of CGT as they
transferred property was at 70%and those that were not aware of CGT was at
30%.

37
Figure 4. 5 Clients awareness on CGT

Clients awareness on CGT

30%
Clients aware of CGT
Clients not aware of CGT

70%

4.3.3. Creation of awareness by the proper regulatory bodies.

This question sought to determine the opinions of the respondents on what they
thought on whether the proper regulatory bodies are creating enough awareness on
CGT in Kenya. This analysis revealed that 15% think the proper regulatory bodies
are creating enough awareness and 85% think to the contrary. Figure 4.6
illustrates the information above.

Figure 4. 6 Creation of enough awareness by proper regulatory bodies

Creation of enough awareness

15%

Enough awareness
Not enough awareness

85%

38
4.3.4. Availability of Information
Respondents’ opinion on the availability of information on CGT revealed that the
available information is inadequate and there is need to create information on
CGT to improve compliance and ease its implementation. This research paper will
also contribute to the already existing information available on CGT. The
responses revealed in opinion that 73% think there is inadequate information and
27% were of the contrary opinion.

Figure 4. 7 Availability of information on CGT

Availability of Information on CGT

27%
Adequate Information on
CGT
Inadequate Information on
CGT

73%

4.3.5. Most appropriate channels to create awareness.

The channels suggested in the creation of awareness on CGT were using
Television, Newspapers, Radio and Magazines. This section was to determine the
most appropriate channel in creating awareness on CGT since the availability of
information on CGT was analyzed as inadequate in the previous analysis. The
opinions of the respondents upon the most appropriate channels to be used by the
proper regulatory bodies revealed that 21% suggested Television was most
appropriate, 6% were for newspapers, 12% for radio, 18% for magazines and
majority at 43% were for all media. Some however were for other opinions such
as conferences and organized galas.

39
 Figure 4. 8 Channels for creating awareness

channels for creating awareness

21%
TV
Newspapers
42% Radio
6% Magazines
All

12%

18%

4.4. Professional responsibility and challenges

The purpose of this third section of the questionnaire was to collect and analyze data
on professional responsibilities and the challenges they face as they practice their
profession in the field. The first part of this section was to determine the type of
property mostly transferred. The second part was to determine whether the
professionals practice their fiduciary obligations to their clients when transferring
property. The third part was to determine whether their clients are willing to pay
CGT basing on their knowledge on CGT. The fourth part was to rate the convenience
of remittance of CGT, the fifth part was to investigate whether the professionals
experience problems based on their knowledge on CGT models and whether these
models have experience problems in their application.

4.4.1. Type of properties mostly transferred.

The types of properties under investigation were categorized as follows;
residential, commercial, industrial, agricultural and beach. This investigation
revealed that properties transferred were mostly residential, commercial and
agricultural. Rates of these transfers are illustrated as in Figure 4.9. below.

40
Figure 4. 9 Type of properties mostly transferred

4.4.2. Practice of fiduciary obligations by professionals.

The practice by the professional of their fiduciary obligations to their clients while
transferring property contributes to the level of awareness of CGT and its
compliance. The rate of the professionals practicing their obligations can be
summarized as 45% did practice their fiduciary obligations while 55% did not.
This can contribute greatly to non-compliance in payment of this tax.

Figure 4. 10 Practice of fiduciary obligation by professionals

Practice of fiduciary obligation

Practiced fiduciary obligation

Did not practiced fiduciary
45% obligation
55%

41
4.4.3. Willingness to pay CGT by Clients
The investigation to determine the willingness to pay CGT by clients revealed that
33% were willing to pay for CGT while 67% were unwilling to pay. This could
have been a result of lack of awareness or skeptics of CGT among other reasons
contributing to the implementation problems facing this tax. Figure 4.11.
illustrates the information above.

Figure 4. 11 Willingness to pay by clients

Willingness to pay by clients

33% Clients willing to Pay

Clients unwilling to Pay

67%

4.4.4. Rate of convenience of CGT remittance in Kenya

Respondents were asked to give opinions on the ratings of convenience of
remittance of CGT in Kenya and majority at 67% were of the opinion it is fair,
18% think it is good, 9% gave their opinion that it was very poor. It is important
to note that remittance of CGT is majorly dependent on the obligations of proper
regulatory bodies to make payment easy and convenient to citizens and transferors
of property. Figure 4.12 illustrates the information above.

42
Figure 4. 12 Rate of convenience of CGT remittance

Convenience of remittance of CGT

9% 18% Excellent
6% Very Good
Good
Fair
Poor
Very Poor
67%

4.4.5. Problems experienced by professionals

According to the survey conducted to obtain opinions from professionals about
the problems they face generally in the process of implementing CGT, most
agreed they experienced problems at 82% and 18% were in denial that they do not
experience problems. Figure 4.13 illustrates the information above.

Figure 4. 13 Problems experienced by professionals

Do Professionals experience prob-

lems in implementing CGT

18% Yes
No

82%

In their assessment, respondents according to profession attributed their problems

to;

43
Valuers

i. Time value of money is not considered in factoring in computation

of CGT.
ii. Difficulty in compliance due to lack of knowledge by clients
iii. Inadequate information on CGT for reference purposes by
professionals

Estates Agents

i. Problem of apportioning CGT when property is let and owner

occupied.

Lawyers

i. Under payment of this tax since the seller does not disclose the true
market value of the property but discloses a lower value so as to pay
low tax

Tax Administrators

i. Records are unavailable to collect data on payment of CGT

ii. Difficulty in calculating CGT considering there are exemptions in
terms of property and other aspects considered in exemptions that
may not be made fully aware.
iii. Resistance by clients to pay as it increases the cost of transfer
iv. Sellers are required to fill the itax portal that is used as a tax
compliance tool and this is supposed to be done before the transfer
making it inconveniencing.

Common problems to all respondents

i. Lack of awareness by clients on payment of CGT

ii. Inadequate information accessible to transferors of property on CGT
and there is little or no information made available to transferors of
property and the general public in Kenya.

44
4.4.6. Common models of CGT practiced and their problems
This study purposed to retrieve data from respondents on their knowledge of the
common CGT models and the most practiced in Kenya. 61% agreed they were
aware of the common models practiced in Kenya and 39% were unaware of the
common CGT models practiced in Kenya. Between the two common models,
Realization-based and Accrual-based, in opinion of those who were aware of the
models attributed to Realization model as most commonly practiced at 80% and
those who were of the opinion Accrual based is commonly practiced was at 20%.
The explained survey is summarized in Figure 4.14 below.

Figure 4. 14 Common models and their rate of awareness

25

20

15

10

0
Yes No Realization-based Accrual-based model

Series1 Series2

The respondents also gave assessments of problems experienced in relation to

these models. Most prevalent problems included;

i. 7 respondents agreed that there is limited knowledge on the practiced

models.
ii. 3 other respondents said the time value of money has not been taken care
of as the rate of this tax does not consider inflation.
iii. 2 respondents agreed that different businesses use different models hence
there is need for harmonization of these models.

45
 Other minor problems

i. The seller is supposed to remit CGT regardless of whether he/she has

received payment from the buyer hence inconveniencing.
ii. Supportive policies on the implementation of these models are not
available.
iii. Challenges in getting sufficient and accurate information relating to the
actual costs incurred in effecting a sale or transfer.
iv. Clients who are aware of the models seek opinions and are mostly biased
to the Accrual-based model and prefer a difference on the purchase price
and the sale price.

4.5. Implementation challenges facing CGT in Kenya

This section of the questionnaire purposed to conduct a survey on the prevalent
challenges facing implementation of CGT on real property in Kenya. Part one was to
rate the creation of revenue by CGT in Kenya. Part two was to acquire opinion on
whether CGT has stifled or crippled entrepreneurship on real property in Kenya. Part
3 conducted an opinion poll on the reasons why CGT was re-introduced; was it for
economic purposes, political or both. The fourth part investigated on whether the
skeptics of CGT affect its implementation. The fifth part collected opinions from
respondents on the most appropriate measures the government should employ to
promote the implementation of CGT in Kenya. The final part of this section was to
conduct an opinion test on the; fairness of CGT, if CGT is a wealth tax, is it good for
the economy, would it help in broadening the tax base and will the number of
disputes between KRA and taxpayers reduce in respect to CGT?

4.5.1. Assessment of creation of revenue through CGT in Kenya

The purpose of this assessment was to determine if CGT is contributing to the
creation of revenue to the government and if it helps in contributes to the economy
of Kenya. Their opinions are summarized in Figure 4.15

46
Figure 4. 15 Assessment of creation of revenue through CGT

In assessment of the respondents’ rate on the creation of revenue through CGT

includes; 2 gave opinion as Excellent, 4 as very good, 10 as Good, 10 as Fair and
5 as Poor as illustrated on Figure 4.15 above.

In their assessment of their opinions, in summary, the respondents attributed their

opinions to;

i. 5 respondents said there is steady growth of CGT and has contributed

significantly on income taxes and also transfer of property is on a larger
scale in Kenya.
ii. 3 respondents who gave a fair opinion on creation of revenue concluded it
due to inadequate information to the public or lack of awareness on capital
gains tax therefore revenue cannot be maximized.
iii. 2 respondents said creation of revenue is poor due to declaration of low
values of land by transferors of property for low payment of tax
consequently affecting revenue created.
iv. Widespread failure in implementing other forms of tax such as rental
income tax therefore increasing the failure of this tax to even create
revenue

47
4.5.2. Stifling of entrepreneurship on real property in Kenya by CGT
This survey was to investigate on whether the implementation of CGT has
crippled or stifled entrepreneurship real property in Kenya. 52% agreed that CGT
has indeed stifled entrepreneurship on real property in Kenya and 48% disagreed.
The information is illustrated in Figure 4.16 below.

Figure 4. 16 Stifling of entrepreneurship by CGT in Kenya

Has CGT sti ffl ed entrepreneurship on

real property

48% 52%

Yes No

4.5.3. Reasons why CGT was re-introduced in Kenya.

The researcher wanted to find out the reason why CGT was re-introduced in
Kenya and the most likely reasons were either political, economical or both.
Respondents gave their opinion through this survey and 55% agreed to both
political and economic, 41% thought it was more for economic purposes and 4%
political.

48
Figure 4. 17 Reasons for re-introducing CGT

Reasons for re-introducing CGT

41%

56%

4%

Economic Political Both Economic and Political

4.5.4. Do skeptics of capital gains tax affect its implementation

The survey of determining whether skeptics of capital gains tax affect its
implementation revealed that 81% agreed to this and 19% disagreed, claiming that
their skeptical assumptions on CGT does not really affect its implementation.

Figure 4. 18 Analysis of whether skeptics of CGT affect its implementation

Analysis of whether skeptics of CGT

affect its implementation

19% Yes
No

81%

49
4.5.5. Opinions on measures to be employed by the government to promote
the implementation of CGT in Kenya.
Respondents from this survey suggested that the government can employ certain
measures to promote the implementation of CGT in Kenya since it is still in its
infancy stage. These opinions were ranked according to the most frequently
suggested and they include;

i. 9 of the respondents concluded that the government should create

more awareness on CGT and justify the importance of paying CGT
while making information available.
ii. 7 suggested that the policies that govern compliance of CGT
should be implemented to discourage skeptics and this
consequently increases knowledge on CGT.
iii. 5 of the professionals suggested that all stakeholders involved in
implementation of CGT should be involved in the assessment of
this tax and increase more training about this tax
iv. 4suggested that the transactions by the KRA should be in sync with
the records at the ministry of Lands to encourage transparency and
ease follow up since records will be digitized.
v. 2of the respondents agreed that engaging the public in getting
opinions on CGT will help in its implementation and improve
compliance.

4.5.6. Influence of other factors affecting implementation of CGT

A survey was conducted to determine the opinions of respondents on what they
thought of these other factors affecting implementation of capital gains tax on real
property in Kenya. Table 4.2. illustrates the ratings.

Table 4. 2 Influence of other factors affecting implementation of CGT

Statement Yes No Not sure

Is it fair to tax Capital Gains? 45% 55% -
Is CGT a wealth tax? 56% 40% 4%
Is CGT good for the economy? 40% 34% 26%
Would CGT help in broadening the tax base? 57% 30% 13%
Will the number of disputes between Kenya 68% 22% 10%

50
 Revenue Authority and taxpayers reduce in
respect to CGT?

4.6. How to overcome implementation challenges affecting CGT on real

property in Kenya.
In opinion from the respondents, suggestions were made to the proper regulatory
bodies that they should employ measures that would help overcome the challenges
facing implementation of CGT on real property in Kenya and these include. These
measures were ranked according to the professionals approached;

Valuers

i. Reduce if not eliminate the ambiguity of law in regards to this form of tax to
help in easy understanding and compliance.
ii. Involving all stakeholders relevant to the implementation of this tax and
creation of awareness and making relevant information available to all
stakeholders.

Estate Agents

i. Conducting public seminars to educate the public on information about CGT

and also get views from the public on areas that need to be addressed more in
matters relating to this tax

Lawyers

i. Create more awareness on all forms of tax and its benefits to the general
public and sensitizing them on the economic benefits of this tax.
ii. Implement policies that enforce the taxation of capital gains.

Tax administrators

i. Integrate systems in Ministry of Lands with KRA systems to harmonize

transactions.
ii. Implement a well-run public land registry record to improve accessibility and
transparency

51
4.7. Hypothesis testing for this study.
The study had stated the hypothesis as follows;

Null Hypothesis (H0): Capital gains tax has a negative role on the
growth of the real property industry in Kenya.

Alternative Hypothesis (H1): Capital gains tax has a positive role on the
growth of the real property industry in Kenya.

The findings of the data collected indicated that the implementation of capital
gains tax has faced problems; in availability of information, problems experienced
by professionals and skeptics of this tax influencing the stifling of real property
entrepreneurship. There is clearly inadequate information in regard to this tax and
thus negatively influencing the growth of the real property industry in Kenya.

This research therefore adopts the Null Hypothesis (H o); Capital Gains Tax has a
negative role on the growth of the real property industry in Kenya.

52
 CHAPTER FIVE
A SUMMARY OF FINDINGS, RECOMMENDATIONS, AND
CONCLUSIONS.
5.1. Introduction:

This chapter is the final section of this research project holding the summary of the
findings of the research paper, giving recommendations and making conclusions on
the topic of research. From the first chapter, the researcher identified problems
existing on the implementation of CGT including information gaps due to its
suspension in 1985, 10 years after its introduction in 1975. The impact the
information gap it has resulted just before its reintroduction in 2014; Chapter two
formulated the literature foundation on the information of CGT available and existing
challenges affecting its implementation. Chapter three identified the research methods
to apply; the Fourth chapter illustrated the outcomes of the field study.

5.2. Summary of Findings and Conclusions

The conclusion of this study will be solely based on the objectives of this study which
was mainly to investigate the challenges affecting the implementation of CGT on real
property in Kenya. The objectives directing the formulation of a conclusion were;

1. Review of capital gains tax practices on the property market in Kenya and other
countries.
2. To evaluate the role of capital gains tax to the real property market in Kenya and
other countries.
3. To assess the challenges faced by the players in the administration of Capital
Gains Tax.
4. To recommend on how to overcome the identified problems.
The conclusion of the study will be made in regard to the stated objectives of the
study;
Review of Capital gains tax practices on the real property market in Kenya and
other countries
From the study, the researcher identified practices on the real property market both in
Kenya and other countries through literature review and the outcomes of the study.
From the literature review, assessment of common models of capital gains tax
practiced both in Kenya and other countries were Realization-based model and

53
Accrual model. The model commonly practiced in Kenya is the Realization-based
model even though not all stakeholders involved are aware of this model. Although,
both models are practiced here in Kenya, the Accrual-based is not as popular as
Realization-based. Common problems to both models besides adequate awareness on
both models include; problem of double taxation by clients who pay both Stamp duty
and CGT, time value of money has not been put into consideration hence not
factoring in inflation, there is limited knowledge on both models and most businesses
use different models hence there is need for harmonization of these models. The rate
of capital gains taxed is 5% in Kenya but according to the outcomes of the research,
most professionals involved still think that rate is too high and needs to be reviewed.

The researcher in the literature review also identified two other countries that practice
CGT; Nigeria and Australia and analyzed their common practices, administration and
its implementation. On the assessment in summary, the researcher concluded that in
Nigeria; Rate of CGT is 20% on any gain accrued after transfer of real property,
capital loss on any disposal of any asset is not deductible from capital gains on
disposal, roll-over relief is practiced for purposes of trade-offs of new assets for older
ones and properties transferred belonging to a deceased person is not subject to capital
gains tax.

In Australia; 20% is charged on any gains accrued after transfer of real property alike
Nigeria. Roll-over relief is also practiced as on the deferral of a capital gain or loss
until a later capital gains tax transaction and it applies to transfer of property during
divorce or on compulsory acquisition.

Evaluation of role of capital gains tax to the real property market both in Kenya
and other countries.

The research identified roles of CGT to the real property market in Kenya and other
countries both from the literature review and the outcomes of the study. Identified
roles of CGT included; increasing level of revenue created through collection of this
tax to broaden the tax base and overcome deficits in the budget in Kenya, broaden
investment areas such as in the real estate sector thus increasing supply and reducing
cost of capital to new and available entrepreneurial firms therefore creating jobs,
attracting investors eventually increasing the levels of economic growth in the
country.

54
Negative effects of the roles and contribution of CGT to real property market both in
Kenya and other countries were also identified as; CGT was viewed as an erroneous
tax and also resulting in double taxation thus seen as a means of crippling investment
in real estate and the notable negative effects of capital gains tax on the real estate
market were seen to affect an investor’s portfolio’s decision especially with the timing
of the sale of the asset with the capital gains consequently causing a lock-in effect by
which investors delay the sale of assets with gains.

Assessment of challenges faced by players in the implementation of CGT in

Kenya

Identified common problems faced by players / professionals in the implementation of

CGT both in the literature review and the outcome of the study can be summarized as;
lack of awareness on CGT by clients as they transfer property, lack of awareness by
the professional to practice their fiduciary obligation to their clients for compliance on
paying the capital gains tax, inadequate information available to the general public on
capital gains tax results on low compliance on this tax and increases skeptics on this
tax, records are unavailable of past transactions of property transfers reducing
accuracy and transparency during the administration of capital gains tax, lack of
knowledge on the exemptions to be considered in the remittance of this tax and
underpayment of this tax when the seller does not disclose the true market value of
the property but discloses a lower value so as to pay low tax.

Other minor problems also include; inconsideration of time value of money in

computing capital gains tax, problems in apportioning CGT when property is let and
owner occupied, resistance to pay by clients as it increases the cost of transfer and the
fact that sellers are required to fill the iTax portal that is used as a tax compliance tool
as this is supposed to be done before the transfer making it inconveniencing.

5.3. Recommendations

The identified problems in the study provoked the researcher to research on possible
solutions to these problems and according to the researcher, they can summarized as;
creating more awareness on CGT, implement policies that govern capital gains tax in
Kenya, involvement of all stakeholders in the implementation of capital gains tax,
synchronizing transactions between the tax compliance body (KRA) and the Ministry

55
of Lands to improve transparency and accessibility of information and engaging the
body in identifying possible problems they face in the implementation of CGT and
help in suggestions of solving the identified problems.

The recommendations suggested were further categorized according to the

stakeholders involved in the implementation of Capital Gains Tax who include;
Professionals in the real estate sector such as valuers and Estate Agents, Lawyers as
policy makers, Tax administrators as the tax compliance body, the National
Government and the general public:

Real Estate Professionals; Valuers and Estate Agents

Valuers and Estate Agents are responsible for valuation of property and agency in
selling and buying of property respectively. They are therefore majorly involved in
the transfer of property and because of that they are expected to practice their
fiduciary obligation in educating their clients on capital gains tax thus improving its
compliance. They are also should be involved with other stakeholders in the
implementation of this tax in making available information through research on
capital gains tax. They should also participate in trainings, seminars and conferences
on capital gains tax to be more aware on this tax. They are also expected to make
available any relevant information to the registration of lands body and the tax
compliance body to improve record keeping and transparency for computation of
CGT.

Policy makers; Lawyers

The policies that govern capital gains tax improve its implementation and therefore
these policy makers should work towards the existing problem of ambiguity in the
Acts that govern capital gains tax. They should also take into the consideration the
raising concern of the high rate of CGT and work towards its revision to improve
compliance. The Income Tax Act regulating the administration capital gains tax is
devoid of certain assets that should be exempted of capital gains tax such as assets
belonging to the deceased. The policy makers should include the justification of this
tax for easy administration and compliance.

56
Tax Administrators (KRA)

This is the tax compliance body majorly involved in the administration of capital
gains tax. They are more justified to educate the public and other stakeholders
involved on the importance of paying capital gains tax. They are also better placed on
providing training on the use of iTax portal to pay capital gains tax and other taxes
such as Stamp duty and Value Added Tax.

Tax administrators also have the responsibility of involving the Ministry of Lands that
deals with majorly registration and administration of land. Synchronizing land
registered and transfers with payment of tax upon these transfers will help in easy
availability of records of lands transferred and also improves transparency in case of
follow up for any inconsistencies. The involvement of the Ministry of Lands requires
digitization of land records.

The tax body should also consider the revision of the capital gains tax together with
the policy makers since it has been identified as an unreasonably high rate resulting in
implementation challenges. Their involvement in this matter will create confidence in
their administration by the public and thus favoring compliance of this tax.

The National Government

The National Government should create more awareness platforms to improve

awareness on CGT to all stakeholders involved in the implementation of capital gains
tax and other taxes imposed on real property such as stamp duty, also, involving
policy makers, tax administration body and the Ministry of lands in harmonizing their
roles in promoting the implementation of this tax.

Lastly, engaging the public in conferences, seminars and trainings to get their opinion
on this tax and thus helping in identifying solutions to these problems. The
government should also conduct benchmarks in other countries and therefore adopt
working strategies that could help promote the implementation of capital gains tax on
real property in Kenya.

57
General public

The members of the public including property owners and investors in the real
property market should fully participate in trainings and seminars educating on capital
gains tax to give their view on this tax and also make suggestions on how to improve
CGT compliance.

5.4. Areas of further study

This study could not investigate on all areas in this scope of capital gains tax and due
to failure of this research to conclude on these areas, further areas of study can be
suggested including;

1. Impact of the information gap existing on capital gains tax as a real property
tax.
2. The measure of validity of capital gains tax as a necessary form of tax in
Kenya and how it can be adequately implemented
3. Influence of real property taxes on real property investments.

58
REFERENCES
Adeyemi, D. S., & Ashaye, M. B. (2012). Re- Introduction of Capital Gains Tax in

the Nigerian Capital Market.

Axis. (2017). Taxation of Residential Rental Income in Kenya. Land and Property

Digest, 33 - 38.

Baumol, W., E, R., Litan, & Schramm, C. J. (2007). Good Capitalis, Bad Capitalism

and the Econoics of Growth and Prosperity. New Haven: Yale University Press.

Bird, R. M., & Slack, E. (2012). Land and Property Taxation; Review.

Burman, L. E. (2009). Taxing Capital Gains in Australia: Assessment and

Recommendations. (C. Evans, & R. Krever, Eds.) Sydney: Thomson Reuters.

Cui, W. (2014, September). Taxation of Capital Gains. Papers on Selected Topics in

Protecting the Tax Base.

E, B. L., & White.I.E. (2003). Taxing Capital Gains in New Zealand: Assessment and

Recommendations. Sydney: Thomson Reuters.

Gentry. (2016). Capital Gains Tax and Enterpreneurship.

Gentry, W. M. (2016). Entrepreneurship, Capital Gains Taxation and.

Grubel, H. (2014). Capital Gains Tax Reform in Canada. Canada: Fraser Institute.

Gulati, I. S. (1957). Capital Taxation in a Developing Country. India: Orient

Longmans Private Ltd.

HABITAT, U. . (2011). Land and Property Tax . UN - HABITAT Policy Guide.

59
Hungerford, T. L. (June 18, 2010). The Economic Effects of Capital Gains Taxation.

Congressional Research Service.

Jibao. (2016). Property Taxation, Capital Gains Tax and Mining Rights Tax in

Zambia. The Government of the Republic of Zambia.

Kahi, M. R. (2016). Implementation Challenges Facing Capital Gains Tax in Kenya.

Institution of Surveyors of Kenya (ISK) - Valuers and Estate Management Surveyors,

Nairobi.

Karinga, E. N. (2015). The Announcement Effect of Capital Gains Tax on Stock

Performance. Nairobi: University of Nairobi.

KNBS. (2017). Kenya National Bureau of Statistics. Nairobi.

Kothari, C. (2004). Research Methodology; Methods and Techniques (2nd Edition

ed.). Rajastham, India: New Age International (P) Ltd.

Koul, L. (1984). Methodology of Educational Research. New Delhi, India: Vikas

Publishing House PVT LTD.

KPMG. (2016). Accounting for Capital Gains Tax in Kenya, Published Paper.Nairobi.

Milwida, G. (2003). Real Property Taxation in the Philippines. Published Paper.

Mugenda, O., & Mugenda, A. (2003). Research Methods: Qualitative and

Quantitative approaches. Nairobi, Kenya: African centre for Technology Studies.

Mutemi, A. (2015). History of Income Tax Law in Kenya. Published Paper.

Nachmias, D., & Nachmias, C. (2014). Research Methods in the Social Sciences (7th

Edition).

60
Nooks, J. (2015). Effect of Capital Gains Tax on Real Estate, Published Paper.

Norregard, J. (2013). Taxing Immovable Property; Revenue Potential and

Implementation Challanges; Fiscal Affairs. International Monetary Fund.

Okeyo, O. A. (2016). Challenges Facing the Implementation of Capital Gains Tax on

Real Property. Nairobi: University of Nairobi Press.

S, G. (1957). Capital Taxation in a Developing Country. India: Orient Longmans

Private Ltd.

Syagga, P. M. (2015). Property Taxation in Kenya. University of Nairobi, Department

of Real Estate and Construction Management. Published Paper.

The Republic of Kenya. (2015). Stamp Duty Act. National Council for law Reporting .

University of Victoria, Wellington. (2009). The Taxation of Capital Gains. Policy

Advice Division of the Inland Revenue Department and by the New Zealand Treasury.

Walliman, N. (2011). Research Methods: The Baiscs. Abingdon: Routledge.

Waris, A. (2007). Taxation Without Principles: A Historical Analysis of the Taxation

System (Vol. 1). Nairobi: University of Nairobi.

Young, E. &. (2012). Corporate Dividend and Capital gains taxation: A comparison

of United States to other Developed Countries. Published Paper.

61
APPENDICES

APPENDIX A
The researcher is carrying out a study on the challenges affecting the
implementation of capital gains tax on real properties in Nairobi County. Data
collected shall only be for the purpose of report writing for partial fulfillment
of Bachelors’ Degree in Real Estate examination requirement. You are kindly
requested to fill this questionnaire appropriately.
SECTION A: GENERAL INFORMATION
Please tick/respond to the questions appropriately
1. Position / Profession of the person filling the questionnaire?
 Estate Agent
 Valuer
 Lawyer
 Tax administrator
2. What is your highest level of education completed?
 Bachelor’s Degree
 Post graduate Degree
 Professional Degree
 Diploma
 High School
 Any Other (State) _______
3. For how long have you worked in your area of specialization?
 0 – 5 Years
 6- 15 Years
 Above 15 Years
SECTION B: LEVEL OF AWARENESS ON CAPITAL GAINS TAX
Please tick/respond to the questions appropriately.
4. Are you aware of Capital Gains Tax?
 Yes
 No

62
 5. Do you think your clients are aware of Capital Gains Tax during transfer of
property?
(If this is irrelevant to you, please move to Qn.6)
 Yes
 No
6. Do you think the proper regulatory bodies are creating enough awareness on
Capital Gains Tax in Kenya?
 Yes
 No
7. If ‘NO’ above, which channels do you think is most ideal to create awareness
on CGT in Kenya?
 TV
 Newspapers
 Radio
 Magazines
8. How would you assess the available information on Capital Gains tax in
Kenya?
 Adequate
 Inadequate

SECTION C: PROFESSIONAL RESPONSIBILITY AND CHALLENGES

Please tick/respond to the questions appropriately.
9. What type of property do you commonly transfer?
 Residential
 Commercial
 Industrial
 Agricultural
 Beach
 Other (Specify if any)
10. Do you practice your fiduciary obligation to your clients when transferring
property?
 Yes

63
  No
11. Are your clients willing to pay Capital Gains Tax on Property sold?
 Yes
 No
12. How would you rate the convenience of remittance of Capital Gains Tax in
Kenya?
 Excellent
 Very Good
 Good
 Fair
 Poor
 Very Poor
13. As a professional, do you experience problems in implementing Capital Gains
Tax on property transferred?
 Yes
 No
14. If Yes in No. 13 above, kindly explain.
______________________________________________________________
______________________________________________________________
______________________________________________________________
______________________________________________________________
________________________
15. Are you aware of the common practices of Capital Gains Tax in Kenya?
 Yes
 No
16. If Yes in No. 15 above, which is the most commonly practiced model of
Capital Gains Tax in Kenya in your experience?
 Accrual – Based Model
 Realization-based model
17. Do you think there are problems faced in the practice of the above models?
 Yes
 No

64
 18. Kindly explain your assessment in 17. Above.
______________________________________________________________
______________________________________________________________
______________________________________________________________
______________________________________________________________
________________________

SECTION D: IMPLEMENTATION CHALLENGES

19. How would you assess the creation of revenue by Capital Gains Tax in
Kenya?
 Excellent
 Very Good
 Good
 Fair
 Poor
 Very Poor
20. Kindly explain your assessment in 19 above.
______________________________________________________________
______________________________________________________________
______________________________________________________________
______________________________________________________________
________________________
21. Do you think the implementation of Capital Gains Tax has stifled
entrepreneurship on real property in Kenya?
 Yes
 No
22. In your own opinion, the reason why CGT was re-introduced in Kenya is/are?
 Economical
 Political
 Both Economic and Political
 Others (Specify if any)
23. Do you think skeptics of Capital Gains Tax affect the implementation of
Capital Gains Tax?

65
  Yes
 No
24. In your own opinion, what measures do you think the government should
employ to promote the implementation of CGT in Kenya?
______________________________________________________________
______________________________________________________________
______________________________________________________________
______________________________________________________________
________________________
25. Please complete this section by marking the appropriate box with a –cross (x).
In your opinion.
Statement Yes No Not
Sure
Is it fair to tax Capital Gains?
Is CGT a wealth tax?
Is CGT good for the economy?
Would CGT help in broadening the tax base?
Will the number of disputes between Kenya
Revenue Authority and taxpayers reduce in respect
to CGT?

SECTION E: HOW TO OVERCOME IMPLEMENTATION CHALLENGES

26. In your own words, what measures do you think the responsible regulatory
bodies should employ to promote the implementation of CGT in Kenya?
__________________________________________________________________
__________________________________________________________________
__________________________________________________________________
__________________________________________________________________
________________________

66
APPENDIX B

67
68
APPENDIX C

69