In a judgment delivered by the Tax Appeals Tribunal on 8 November 2024 in the matter of Paula Kendi Weru vs Commissioner of Legal Services & Board Coordination, the Tribunal ruled that the tax point for payment of capital gains tax (CGT) was on or before the date the application for transfer of the property was made at the relevant Lands Office.

Summary of the case

The Tribunal made this judgment in respect of a KRA assessment seeking additional CGT on gains made on a sale of land in November 2022, before the CGT rate was increased from 5% to 15%.

In the case, the taxpayer agreed to sell property and delivered all the necessary completion documents to the buyer’s advocates in November 2022. Subsequently, she received the full purchase price in November 2022 and proceeded to pay CGT on the gain realised from the sale of the property in December 2022. The applicable CGT rate at the time was 5%, with the rate increasing to 15% from 1 January 2023. The instrument of transfer of the property was registered at the Lands Office on 30 January 2023.

The KRA issued an assessment on the taxpayer demanding additional CGT on the basis that the transfer of the property occurred in January 2023 when the CGT rate was 15%. The KRA argued that the proper tax point was January 2023, when the parties registered the transfer instrument in favour of the transferee.

The Tribunal’s determination

Upon hearing the parties, the Tribunal allowed the appeal in favour of the taxpayer, stating that the tax point for the payment of CGT was on or before the date the application for transfer of the property was made at the relevant Lands Office, as provided in the now repealed Paragraph 11A of the Eighth Schedule to the Income Tax Act.

In reaching the above decision, the Tribunal distinguished its holding from the High Court’s decision in Law Society of Kenya vs Kenya Revenue Authority & Attorney General (2017) (the LSK case), which declared Paragraph 11A of the Eighth Schedule of the Income Tax Act unconstitutional and held that CGT was only payable after registration of the transfer instrument in favour of the transferee. The Tribunal stated that the LSK case did not render the entire provision relied upon unconstitutional, but only the part requiring the relevant transferor to bear the CGT liability before he/she is put in funds.

Going forward

This judgment clarified that the tax point under the repealed Paragraph 11A of the Eighth Schedule of the Income Tax Act was on or before the date the application for the transfer of property  was made at the relevant Lands Office. In this regard, this judgment would provide guidance in determining the CGT rate for transactions that were completed in late 2022 while registration occurred in 2023, when the CGT rate was increased from 5% to 15%. It is noteworthy that due to challenges with the Ardhi Sasa system at the Lands Registry in the last few months of 2022, a number of property transactions were completed in 2022, but registration only occurred in 2023 when the challenges with the Ardhi Sasa system were resolved.

It should be noted that the judgment is only applicable to transactions undertaken before Paragraph 11A of the Eighth Schedule of the Income Tax Act was repealed in July 2023. Subsequent transactions would be subject to the current provision, which provides that the tax point for CGT on the transfer of property under the Eighth Schedule to the Income Tax Act is the earlier of (a) receipt of the full purchase price or (b) registration of the transfer.

This decision may, however, be appealed by the KRA.

Written and prepared by Alex Mathini and Andrew Oduor, Partners and Nelly Chepkoech, Associate, Bowmans Kenya