CM REGULATORY ALERT
CM Advocates LLP issues this Regulatory Alert to highlight and clarify the current Capital Gains Tax (CGT) position applicable to inherited property in Kenya, following amendments introduced by the Finance Act, 2023. While inheritance has traditionally enjoyed favourable tax treatment, recent legislative changes have materially altered how the cost of acquisition is determined for CGT purposes where inherited property is subsequently disposed of.
These changes introduce a time-based restriction that directly affects beneficiaries, estate administrators, trustees, and property investors, making careful tax, estate, and succession planning increasingly critical.
1. The Traditional Position: Market Value at the Time of Inheritance
Under Kenyan tax law, the transfer of property through inheritance is not a taxable event for Capital Gains Tax purposes. Where a beneficiary acquires property from a deceased person, the law has historically treated the beneficiary as having acquired the property at its open market value as at the date of inheritance.
This market value constitutes the cost of acquisition for CGT purposes and is used in computing capital gains upon a subsequent taxable disposal.
In practical terms, CGT has traditionally been calculated as follows:
Selling price
minus
Market value at the date of inheritance
(plus allowable incidental costs)
This approach reflects a principle of fairness: the beneficiary did not purchase the asset and should not be taxed on gains that accrued during the deceased’s lifetime.
2. The Finance Act, 2023: Introduction of Paragraph 4A to the Eighth Schedule
The Finance Act, 2023 introduced a significant anti-tax-avoidance provision by inserting Paragraph 4A into the Eighth Schedule to the Income Tax Act.
The provision applies where:
• property is transferred in a transaction not subject to CGT, such as inheritance or certain gift transfers; and
• the same property is subsequently transferred in a taxable transaction within a period of less than five years.
In such circumstances, the law provides that the adjusted cost of the property in the subsequent taxable transfer shall be the original adjusted cost in the hands of the previous owner, rather than the market value at the time of inheritance.
This represents a clear departure from the long-standing rebasing principle.
3. The Five-Year “Cooling-Off” Period Explained
Paragraph 4A effectively introduces a mandatory five-year holding period before a beneficiary may rely on market-value rebasing for CGT purposes.
(a) Disposal After Five Years
Where inherited property is sold after the lapse of five years, CGT is computed using the market value at the date of inheritance as the cost of acquisition. In such cases, the traditional tax treatment is preserved.
(b) Disposal Within Five Years
Where inherited property is sold within five years, the beneficiary is deemed to have acquired the property on the same date and at the same value as the deceased person.
In effect, the beneficiary steps fully into the tax position of the deceased, including historical acquisition costs.
4. Illustrative Example
If a father acquired property in 1995 at a cost of KES 2 million and, upon his death in 2024, the property had a market value of KES 20 million:
• If the beneficiary sells the property in 2026 (within five years), CGT will be computed using KES 2 million as the cost of acquisition.
• If the beneficiary sells the property in 2030 (after five years), CGT will be computed using KES 20 million as the cost of acquisition.
The difference in CGT exposure between the two scenarios can be substantial.
5. Policy Rationale: Anti-Avoidance Objectives
The introduction of Paragraph 4A is clearly aimed at addressing perceived tax avoidance practices, particularly where property is transferred tax-free and rapidly sold at a rebased value to minimise CGT.
By imposing a time threshold, the law seeks to:
• preserve the integrity of the CGT regime;
• prevent artificial stepping-up of property values shortly before disposal; and
• ensure that historic gains are appropriately taxed where rapid onward transfers occur.
6. Practical Implications for Taxpayers and Estates
(a) Increased CGT Exposure
Beneficiaries disposing of inherited property within five years may face significantly higher CGT liabilities, particularly where the property was acquired decades earlier at a low historical cost.
(b) Reduced Liquidity Flexibility
Heirs who need to dispose of property shortly after succession—due to estate administration costs, debt settlement, or redistribution among beneficiaries—may encounter unexpected tax consequences.
(c) Heightened Importance of Valuations
Professional valuation at the point of inheritance remains essential, both for compliance purposes and to support CGT computations once the five-year threshold is crossed.
(d) Estate and Succession Planning Considerations
Families, trustees, and advisors must now factor CGT timing into succession structures, trust planning, intergenerational wealth transfers, and post-probate disposal strategies.
7. Conclusion
While inherited property continues to benefit from CGT relief at the point of transfer, the Finance Act, 2023 has materially reshaped the tax landscape by introducing a five-year restriction on market-value rebasing.
Beneficiaries who dispose of inherited property before the lapse of five years are now exposed to CGT based on the deceased’s original acquisition cost, potentially eroding the economic value of the inheritance.
As a result, timing, valuation, and structured planning have become central to managing CGT exposure on inherited property. Early tax advice and integrated estate and succession planning are no longer optional—they are essential for compliance, predictability, and long-term wealth preservation.
Issued by
WELL Practice (Wealth, Estate, Legacy & Lifestyle)
Email: wellpractice@cmadvocates.com
Tax & International Business Advisory (TIBA) Unit
Email: tiba@cmadvocates.com
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Disclaimer
This CM Regulatory Alert is for general information purposes only and does not constitute legal advice.