8.4 Taxation
This section concerns itself with the implications of taxation of the housing market including taxes levied on: construction inputs, landlords and property developers, and property transactions.
Kenya’s taxation system regime covers income tax, value-added tax, customs and excise duty. The income tax is paid by individuals as Pay As You Earn (PAYE) through an automatic checkoff by the employer who remits the PAYE to the Kenya Revenue Authority. Companies pay corporate tax on their profits at the end of the year as income tax. Individuals and partnerships also file their annual returns for all profits made on their income for the financial year. Kenya employs a progressive approach to taxation whereby those who earn more pay more taxes on a graduated scale of taxation. This accords with the philosophy undergirding taxation that those most able to pay should pay more.
In the context of housing, developers must pay income tax on the profits made such as through corporation tax where they have incorporated as companies. Developers also pay value added tax for any supplies that count as construction inputs and may also be required to pay VAT on sales made. Imports made that go into the development of housing may also be liable to customs duties. In line with the philosophy of taxation creating incentives or disincentives and thus dictating investment behaviour and consumption, Kenya has introduced various tax incentives both on the supply and demand sides of housing to encourage uptake.
8.4.1 Tax Policy
National Tax Policy 2022
STATUS/ISSUE
RECOMMENDATION
Various tax incentives are provided in law in pursuit of national objectives; however, their application is limited due to the structuring of the incentive.
Support the development of such a register and the monitoring and evaluation framework.
8.4.2 Tax incentives on the demand side
8.4.2.1 Income tax
The Affordable Housing Act 2024 stipulates that the employer’s contribution is an allowable deduction under Section 15 of the Income Tax Act. The Act further entitles resident individuals who pay the Affordable Housing Levy, to affordable housing relief of 15% of their contribution capped at a maximum of Kshs 9,000 per month and Kshs. 108,000 per annum.
8.4.2.2 Stamp duty
STATUS/ISSUE
RECOMMENDATION
Absence of mechanisms or guidelines on who is a first-time home buyer to benefit from stamp duty exemption on transfer.
First time home buyers have not been able to enjoy the stamp duty exemption provided in law since it has been difficult to identify them.
Review the law to use another criterion for determining who is to benefit from the stamp duty exemption (for example, for a defined number of years allow all housing units delivered for less than Kshs. 5 million to be exempt from stamp duty, thereby kickstarting supply); or alternatively, enact mechanisms for identifying a first-time home buyer.
The Act exempts documents including registration documents relating to a building society from paying stamp duty. Notably however, the exemption does not extend to mortgage or to the release or discharge of a mortgage, which are far much more significant
Extend the stamp duty exemption to mortgage and release or discharge of mortgages issued by building societies.
8.4.2.3 Mortgage relief
STATUS/ISSUE
RECOMMENDATION
An increase of deductible interest on Mortgage to Kshs.300, 000 p.a. (25,000 p.m) from Kshs.150,000 (12,500 p.m) (Finance Act, 2016). This reduces the amount of tax to be paid and supports homeownership.
The Tax Laws (Amendment) Act 2024 has increased the deductible interest on mortgages for purposes of taxable income computation from a maximum of Kshs. 300, 000 per annum to Kshs. 360, 000 per annum.
This mirrors the proposal in the Finance Bill 2024 which was withdrawn following public outcry on tax hikes.
Increase awareness of this relief and ease access to mortgages to enjoy this incentive.
8.4.2.4 Savings
The law previously provided for tax Relief of up to Kshs. 96,000 annually (or Kshs. 8,000 monthly) for savings towards housing. However, this was scrapped effective January 2021, partly due to the low uptake of the product.
Promoting Savings is a critical route to promoting home ownership and mechanisms to incentivize the same.
A homeownership savings plan has just received approval to be listed on the stock exchange by the CMA and it would be helpful to share learnings of such products for market development.[1]
8.4.2.5 Taxation on the transfer of pension contribution into housing
1. For monies that are in the unregistered pot (i.e. non-tax exempt pot) – Member does not pay tax since it was taxed at payroll
2. For monies that are in the registered pot (i.e. tax-exempt pot) – Member pays tax as per the tables below depending on their age and service to the employer:
If the member is below 50 years old and has been in the service of the employer for less than 15 years, the below tax rules apply:
For monies that are in the unregistered pot (i.e. non tax exempt pot) – Member does not pay tax since it was taxed at payroll
For monies that are in the registered pot (i.e. tax exempt pot) – Member pays tax as per the tables below depending on their age and service to the employer:
If the member is above 50 years old or has been in the service of the employer for more than 15 years, the below tax rules apply:
Value Of Lump Sum (Sliding Scale)
Rate of Tax
1st KShs 400,000
10%
Next KShs 400,000
15%
Next KShs 400,000
20%
Next KShs 400,000
25%
Above K Shs 1,600,000
30%
8.4.3 Rates
STATUS/ISSUE
RECOMMENDATION
The National Rating Act 2024 was enacted into law on 4th December 2024 following the assent of the National Rating Bill 2022 (National Assembly Bill No. 55 of 2022).
The National Rating Act:
i) repeals the Rating Act and the Valuation for Rating Act and provides for a comprehensive framework for the imposition of rates on land and buildings by County Governments.
ii)provides guidance to county governments in preparing their respective rating legislation in their capacities as rating authorities and thus ensure proper planning and harmonisation across the country
iii)Updates the rating laws to conform the Constitution 2010 now that the laws were old and modelled on the former local authorities (municipal and county councils) being the rating authorities.
iv) Promotes the adoption of technology in conducting valuations for purposes of rating as well as rating itself-Section 6 provides that rating authority (county governments) shall identify or create an appropriate technological system for preparation and implementation of the roll.
v) Under sections 21 and 22 county governments are at liberty to appoint a valuer so long as they 7 years’ experience and are registered with the Valuers Registration Board which means there is now room for use of private sector valuers. Section 26 however still retains provision for county governments to request the Chief Government Valuer of the national government to undertake valuation on their behalf. This will cure the current practice where County Governments have relied on the Ministry of Lands/government valuers to produce valuation rolls, with only a few using private sector Valuers.
Section 39 of the National Rating Act 2024, provides for the establishment of the National Rating Tribunal to hear and determine matters relating to the valuation of rating. The establishment of this Tribunal should be fast-tracked. For operational efficiency and to ensure access to justice, the Tribunal should have the authority to sit in circuit in various regions in the country.
Section 8 of the National Rating Act defines rateable owner to include an occupier of the rateable property. The application of this may prove problematic as an occupier may neither be a legal nor beneficial owner and thus have no identifiable interest beyond occupying the property.
8.4.4 Tax Incentives on the supply side (to reduce the cost of housing)
STATUS/ISSUE
RECOMMENDATION
VAT exemption for purchase of local and importation of goods for the construction of Houses under AHP-Finance Act 2019, which can lead to
Simplify access to VAT exemption on inputs as this can reduce construction costs by up to 9%.[2]
Reduction in corporation tax to 15% for construction of at least one hundred (100) residential housing in a year of income, subject to approval by the Cabinet Secretary responsible for Housing. (The Statute Law (Miscellaneous Amendments) Act, 2017).
Difficulty in obtaining these incentives as the current wording requires 100 units to be delivered in a single year, which is difficult with the length of time required for approvals and offtake.
Consider amending the provisions to allow delivery over a longer period, at least till efficiencies in delivery are achieved as this can reduce sale price by as much as 4%[3].
Reduced customs tariffs on imported inputs for construction of houses under the affordable housing scheme. For instance, Import Declaration Fee (IDF) has been reduced from two per cent to 1.5 per cent.
Promote uptake of this incentive
National Environmental management Authority (NEMA) and the National Construction Authority (NCA) levies of 0.1 per cent and 0.05 per cent of the cost of construction respectively, were temporarily scrapped but have been reinstated.
Consider waivers for these fees to reduce costs of affordable housing as part of a one approval fee.
Thin capitalization laws provide for a restriction of interest expense deduction when computing taxable income where a foreign controlled company has a debt-to-equity ratio exceeding 3:1. There is no interest restriction for companies undertaking AH projects
Promote uptake of this incentive
The use of CGT taxation revenue contributes to the wider government kitty.
Consider pooling CGT revenue from housing in a ring-fenced fund to invest in infrastructure or fund offtake finance for affordable housing.
The Finance Act 2022 amended the Income Tax Act and increased the Capital Gains Tax on the total gain realized upon disposal of real property from 5% in 2020 (introduced in 2015) to 15% from January 2023.
While CGT is an important and more equitable source of taxation, the unpredictability of increasing the rate triple-fold in one year can discourage investment into housing.
Adoption of the National Tax Policy 2022 that encourages investment in affordable housing is likely to provide a multiplier effect in the medium to long term as the taxable base will grow.
The law governing the CGT relationship does not provide for indexation (inflation adjustment) when computing capital gains tax payable upon sale/disposal of a property thereby distorting property prices.
Review the law to provide for indexation (inflation adjustment/adjusting the original price of property upwards for purposes of tax to mitigate inflationary distortions) when calculating capital gains tax to consider the inflation that has affected property prices and discount the same.
The Income Tax Act is amended by the Tax Laws (Amendment) Act 2024 to allow for the exemption from taxation of income earned by non-resident contractors, subcontractors, employees and consultants for a project financed by a grant under an Agreement between the Government of Kenya and a development partner.
Provided that:
The project is a hundred percent financed by the grant;
The contractors, subcontractors, employees and consultants retain their status as non-residents for the tenure of the Agreement; and
The income is directly related to the project.
8.4.5 Residential Rental Income Tax
Residential Retal Income tax
(Introduced via Finance Act 2015 / Section 6A of the Income Tax Act and amended in 2020)
STATUS/ISSUE
RECOMMENDATION
This provides a flat tax of 10% on gross rental income, without deduction of any expenses, up to annual income of Kshs. 15 million. Beyond Kshs. 15 million, landlords are required to pay 30% tax on net rent (after deduction of expenses). This is a simpler tax mechanism to encourage payment on residential rental tax.
Since 80% of urban Kenyans (92% in Nairobi) rent their homes, consider a favourable flat tax to incentivize investment in affordable housing. For example, a flat tax as low as 3% on gross rent, for units renting for less than Kshs. 15,000/- per month, with no cap on portfolio size would be a key incentive for investment in this sector and allow an overhaul of the mushrooming informal settlements.
8.4.6 Affordable Housing Levy
The Affordable Housing Levy (“Levy”) is imposed by the Affordable Housing Act 2024 payable at a rate of 1.5% on the gross salary of an employee with a matching contribution from the employer. The Levy is payable not later than the ninth working day after the end of the month in which the gross salary was due, received or accrued.
The Levy was initially introduced through Section 84 of the Finance Act 2023 as an amendment to the Employment Act. This was however challenged before the High Court in Okoiti & 6 Others v Cabinet Secretary for the National Treasury and Planning & 3 Others; Commissioner-General, Kenya Revenue Authority & 3 others (interested Parties) (Petition E181, E211, E217, E219, E 221, E227, E228, E232, E234, E237 & E254 of 2023 (Consolidated) [2023] KEHC 25872 (KLR) (Constitutional and Human Rights) (28 November 2023) (Judgement). The Court decided that the introduction of the Levy through an amendment of the Employment Act by the Finance Act was unconstitutional as it lacked a comprehensive legal framework providing for its administration. The Court also issued orders barring the collection of the Levy.
In compliance with the High Court’s ruling, the National Assembly passed the Affordable Housing Act, 2024 upon which the Levy is currently anchored. The Affordable Housing Act, 2024 has also been challenged for lack of sufficient public participation before it was passed and its exclusion of people with informal jobs. The matter is currently before the High Court in Gakenyis & 4 Others v Cabinet Secretary Lands & 4 Others (Constitutional Petition E154, E173, E176, E181, E191 & 11 of 2024 (Consolidated)) and Kenya Human Rights Commission & Katiba Institute v National Assembly & 3 Others HCCHRPET/E191/2024.
STATUS/ISSUE
RECOMMENDATION
The Affordable Housing Levy has faced a lot of opposition and criticism from the public. This is mainly because it increases the tax burden of the citizens.
Review of the Affordable Housing Levy with input from relevant stakeholders. Consider including a ceiling of the maximum contribution by an individual.
Additional ways of raising funds to finance affordable housing schemes should be explored. For instance the tokenization of affordable housing projects into digital tokens that can be traded on the blockchain markets. This will necessitate the establishment of a regulatory framework for the digital currency market which is currently not in place.
[1]
[2] KPDA Research displayed at KPDA conferences
[3] KPDA Research displayed at KPDA conferences.
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