New tax bad for home ownership

Kenya: Real estate buyers will have to dig deeper into their pockets when capital gains tax takes effect on January 1, 2015.

Parliament recently passed an amendment to the Finance Bill 2014 that proposed the levying of a five per cent tax on proceeds realised from the sale of property. The law provides imposition of capital gains tax by amending the Eighth Schedule of the Income Tax Act.

The Government suspended the controversial tax in 1985 to encourage investments in real estate, stocks and the mining sector.

Recently, I had a chat with tax experts, who argued that the re-introduction of the levy would broaden the tax base and increase revenue collection. Tax experts and economists concur that the re-introduction is attributed to robust growth in the real estate sector, extractive industries and stock market in the country.

Property values in Kenya have hit the roof and are attracting foreign investors, while the Nairobi Securities Exchange (NSE) is ranked the second best performing on the continent.

The discovery of mineral resources that have increased the demand for land in areas like Turkana over the past five years is another reason for the re-introduction of the tax.

Even as the planned re-introduction of the tax causes ripples within real estate circles, the Government can afford a smile as property it acquires under compulsory acquisition is exempted from capital gains tax.

On the other hand, some experts argue that there is still a need to attract robust investments in the real estate sector to plug up the current housing shortage.

But the re-introduction of capital gains tax may be a disincentive to prospective real estate investors. It is estimated that the country has an annual demand of over 250,000 houses but only about 50,000 units are built, creating a shortage of up to two million homes.

Barely 11 months ago, the Ministry of Lands, Housing and Urban Development invited bids from real estate developers to construct 6,200 housing units in Nairobi.

Scheme

The housing project was part of a country-wide scheme that could earn investors billions of shillings under public-private partnerships that will see contractors build, manage and then hand over homes to the State.

The plan targets the construction of 300,000 housing units, with the initial phase being in Nairobi.

According to a media notice by the Housing ministry, the houses would be constructed in Shauri Moyo (1,200 units), Park Road (1,000) and Starehe (4,000)

Some financial and risk consultants argue that the new tax means more revenue but the benefit should be assessed in terms of the impact it will have on home ownership.

With housing prices already out of reach for a good section of the middle-class, it would be expected that any Government move should make home ownership easier.

I think the tax could be countered by rejuvenating the real estate sector by expanding infrastructure, even though it takes time while taxation dates are immediate.

— The writer is an advocate of the High Court

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