Transferring Property Into And Out Of Family Trusts: Will You Pay Tax?

Family trusts have become an increasingly popular tool in estate planning, especially in Kenya. A family trust allows the settlor (the person creating the trust) to transfer property (both movable and immovable) to the trust, which will be managed by trustees for the benefit of beneficiaries. This allows the settlor to structure their estate during their lifetime, ensuring that their beneficiaries can avoid the lengthy and often burdensome probate process, which can extend for many years. https://www.businessdailyafrica.com/bd/economy/court-cases-rock-sharing-of-mbiyu-koinange-estate-4010510

In Kenya, family trusts are governed by various laws, including the Trustees (Perpetual Succession) Act, the Income Tax Act and the Stamp Duty Act. Each of these laws offer unique benefits for individuals and families aiming to effectively manage and allocate their wealth.

The Trustees (Perpetual Succession) Act 2021 provides that a family trust should be established for the preservation or creation of wealth across generations. In light of this objective, it is essential to understand the tax implications of movement of property into and out of the trust. This article explores the tax considerations from three perspectives:

i. when property is transferred from a settlor to a family trust;

ii. when the property is transferred from the trust to a beneficiary; and

iii. when property is transferred from the trust to a third party.

In these transactions, two primary taxes typically arise: Stamp Duty and Capital Gains Tax (CGT).

Stamp Duty

Stamp duty is a tax imposed by the Kenyan government on legal documents to authenticate and formalise property transactions. Under the Stamp Duty Act (Cap 480, Laws of Kenya) (“Stamp Duty Act”), the transfer of property is subject to stamp duty, unless an exemption applies. Stamp Duty is charged according to the value of the transaction or the nominal rate on certain financial instruments and transactions. Stamp duty at a rate of 4 % is payable in case the land is located in a municipal area and 2% for land in rural areas. Stamp duty at the rate of 1% is payable on the transfer of shares and increase in share capital.

Capital Gains Tax (CGT)

According to Section 3(2) (f) of the Income Tax Act (“the ITA”) as read together with the Eighth Schedule to the ITA, Capital Gains Tax (“CGT”) at the rate of 15% is applicable on the transfer of property situated in Kenya. CGT is calculated using the following formula:

Net Gain = (Transfer value - Incidental Costs on Transfer) - Adjusted Cost (Acquisition Cost + Incidental Costs on Acquisition + Any enhancement Cost) * 15%

It is the responsibility of the transferor (seller) to account for CGT and CGT is applicable where the transfer value exceeds the adjusted cost.

A. Tax Implications of Transferring Property to a Family Trust

CGT: Paragraph 58 of the First Schedule to the ITA exempts from CGT the transfer of immovable property to a family trust.

Stamp Duty: Generally, any transfer of property made as a gift during the life of the owner of the property is subject to payment of stamp duty. However, under Section 52(2)(b) of the Stamp Duty Act, a transfer, or an agreement for a conveyance or transfer, operating as a voluntary disposition of property is exempt from stamp duty if the transfer is to a registered family trust;

B. Tax Implications of Transferring Property from the Trust to a Beneficiary

It’s important to note that the Trustees Perpetual Succession Act provides that a family trust shall not be invalid for reason that the settlor or joint settlors are also beneficiaries to the trust. Therefore, the settlors, can also be beneficiaries of the trust.

CGT: Paragraph 2(g) of the Eighth Schedule to the ITA provides an exemption from CGT in cases where a trustee transfers property held in trust to a beneficiary who has become absolutely entitled to it.

Stamp Duty: Section 52(6) of the Stamp Duty Act exempts from stamp duty transfers of property from a trustee or a person exercising a fiduciary role under the trust to a beneficiary of the trust.

C. Tax Implications When Property is Transferred from the Family Trust to a Third Party

CGT: Paragraph 36 (g) of the First Schedule to the ITA exempts from Capital Gains Tax, property, including investment shares, which is transferred or sold for the purpose of transferring the title or the proceeds into a registered family trust. Therefore, where property is transferred to a third party from a family trust, the transfer will be exempt from tax.

Stamp Duty: The transfer of property to a third party is subject to stamp duty.

Conclusion

Navigating the complexities of property transfers, stamp duty regulations, and wealth planning in Kenya requires meticulous attention to legal frameworks and proactive planning. At CM Advocates LLP, we understand the nuances of Family Trusts, Kenyan tax and property laws, and our team of seasoned experts is dedicated to providing tailored advisory services to ensure compliance, minimize liabilities, and safeguard your interests. Whether you are structuring a property transaction, setting up a trust, or optimizing tax efficiency, we offer clear, actionable guidance to help you avoid pitfalls and achieve your objectives with confidence.

Contributors: Wanjiku Kiguatha and Tabitha Muchiri