Court Rules On Non-payment Of Capital Gains Tax By Chargee Exercising Statutory Power Of Sale

The Capital Gains Tax (CGT) is a tax chargeable on the whole of a gain which accrues to a company or an individual on or after 1st January, 2015 on the transfer of property situated in Kenya, whether or not the property was acquired before 1st January 2015. It was suspended in 1985 and re-introduced in the Finance Act of 2014 but became effective on 1st January 2015.Kenya Revenue Authority (KRA) published a Notice on 4 th October 2016 which discontinued manual payment of both stamp duty and CGT and required the simultaneous payment of both taxes online while undertaking transfer of property. This meant that the I-tax system would not allow the purchaser to pay stamp duty unless he/she/it availed an approved CGT Acknowledgement slip or exemption slip as the case may be.On September 2019, KRA indicated that it would verify all applications for exemption from CGT. The verification process led to a delay in the timeline of concluding property transactions since KRA had to confirm whether the transaction is CGT-exempt prior to the purchaser proceeding to pay stamp duty.Kenya Bankers Association (KBA) was aggrieved and instituted judicial proceedings challenging KRA’s action to twin the payment of CGT and stamp duty as it would be an infringement on the right of property of both the bank as a chargee and the purchaser and would place the burden of paying the chargor’s liability on either the bank or purchaser. The High Court agreed with KBA and found that the decision on twin payment of stamp duty and CGT was unreasonable and gave an order requiring KRA to allow payment of Stamp Duty on an instrument of transfer following the sale of land by a Chargee exercising their statutory power of sale without the requirement of the Chargee to produce an acknowledgement number for payment of CGT. KRA was dissatisfied with this outcome, hence appealed the decision of the High court to the Court of Appeal.The Court of Appeal upheld the decision of the High court and ruled as follows:

A chargee is a proprietor of the charge and not the land while a chargor is the proprietor of the land. The interest of the chargee is confined to the sum borrowed and chargee’s statutory power of sale is invoked upon the chargor’s default to repay the loan. In executing the transfer after exercising its statutory power of sale a chargee does so in its capacity as a nominee and it does not become a proprietor of the land. A chargee through its statutory power of sale only gets the amount secured by the Charge and as such there is no gain. Ultimately a Chargee is not subject to pay CGT when it exercises its statutory power of sale.

The Court of Appeal concluded that the unilateral decision for Kenya Banker’s Association members to collect CGT from its various borrowers by twinning the payment of CGT and stamp duty was clearly unfair and irregular. KRA published a Notice dated 23 rd March 2020 relinquishing the condition to present a CGT Acknowledgement slip before processing of stamp duty. This reform is expected to improve the ease of doing business by creating efficiency in the process and promoting investments. Pursuant to this Notice, KRA has made the necessary steps on the I-Tax system by delinking payment of stamp duty and CGT. Accordingly, a purchaser can proceed with payment of stamp duty without presenting the CGT Acknowledgement slip.