Capital Gains Tax on inherited land building Kenya
Last updated: October 5, 2024
Capital Gains Tax on Inherited Property: How Cost of Acquisition Changed in the Dhanjal Ruling
In Kenya, paying taxes is a legal obligation for every citizen. Taxes come in many forms, and one of them is Capital Gains Tax (CGT)—a tax on profits earned when you sell property like land or buildings.
But what happens when you inherit property and later sell it? This question is at the heart of the Daljit Singh Dhanjal v Commissioner of Domestic Taxes case, a game-changing legal battle that could transform how taxes are calculated on inherited property.
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The Story Behind the Case
Daljit Singh Dhanjal inherited a piece of land from his father in 2014. A few years later, in 2022, he sold the land for Kshs. 177,915,900. As a law-abiding citizen, Dhanjal filed his CGT return with the Kenya Revenue Authority (KRA), paying taxes based on the profit he made from the sale.
Here’s where things get tricky: To figure out how much tax he owed, Dhanjal calculated the acquisition cost of the land (the amount it was worth when he inherited it). He used a valuation done by a real estate company in 2014, which pegged the value at Kshs. 150,000,000.
KRA, however, wasn’t convinced. They said that because Dhanjal inherited the land, he didn’t actually pay anything to acquire it—so, they disallowed the Kshs. 150,000,000 as the acquisition cost. This meant Dhanjal had to pay a lot more tax than he expected. He objected to KRA’s decision, and when they still insisted, he took the case to the Tax Appeals Tribunal.
How Capital Gains Are Calculated (With an Example)
To understand the importance of this case, let’s first break down how Capital Gains Tax works. CGT is calculated based on the difference between the sale price of a property and its acquisition cost. The formula looks like this:
Capital Gain = Sale Price − Acquisition Cost
KRA charges CGT at 15% of the capital gain. Now, let’s apply this to a simple example:
Imagine you inherited a piece of land from your father in 2015. The land is valued at Kshs. 5,000,000 at the time you inherited it. In 2024, you sell the land for Kshs. 10,000,000.
Sale Price: Kshs. 10,000,000
Acquisition Cost: Kshs. 5,000,000 (the value when you inherited the land)
Using the formula:
Capital Gain = Kshs.10,000,000 − Kshs.5,000,000 = Kshs.5,000,000.
The CGT payable would be 15% of the capital gain:
15% of Kshs.5,000,000 = Kshs.750,000.
In this case, you would pay Kshs. 750,000 as CGT.
Now, imagine if KRA disallowed the acquisition cost of Kshs. 5,000,000, treating the land as having zero value when you inherited it. The calculation would look like this:
Capital Gain = Kshs.10,000,000 − Kshs.0 = Kshs.10,000,000
Your CGT payable would be:
15% of Kshs.10,000,000 = Kshs.1,500,000
That’s double what you should have paid, simply because KRA ignored the acquisition cost! This is why the acquisition cost is critical when calculating CGT — it significantly affects how much tax you pay.
What’s the Big Deal?
This case is important because KRA has a notorious history of disallowing acquisition costs on inherited properties, leaving taxpayers with larger tax bills than they should have. The Tribunal's ruling on this case has the potential to change how inherited property sales are taxed in Kenya, and many people who inherit land or buildings are watching closely.
KRA argued that because Dhanjal didn’t pay any actual cash when he inherited the land, the acquisition cost should be zero. They relied on legal provisions that, in their view, didn’t allow inherited properties to have a “cost.”
But the Tribunal disagreed. It pointed to a section of the Income Tax Act that allows the market value of a property to be used as the acquisition cost, especially when the property is acquired by inheritance. Since there was no stamp duty involved when Dhanjal inherited the land (because inherited property is stamp duty-exempt), the Tribunal ruled that the market value from 2014 should be used instead of zero.
What the Court Decided
The Tribunal ruled in Dhanjal’s favor, saying that KRA was wrong to disallow the acquisition cost of Kshs. 150,000,000. Here's the key takeaway: When you inherit property, you are allowed to use its market value at the time of inheritance as the acquisition cost. This is a big win for taxpayers because it means that inherited property can be sold without unfairly high taxes.
In simpler terms: If you inherit a piece of land, you didn’t pay for it with cash, but that doesn’t mean it’s worth nothing. The law says you can use the market value (how much the land would sell for) at the time you inherited it to figure out how much tax you owe when you eventually sell it.
Why Should You Care?
You may be wondering, “Why should I care about this case?” Here's why:
If you inherit property someday, this ruling protects your rights. KRA can no longer force you to pay higher taxes by ignoring the value of what you inherited.
This ruling clarifies tax law for anyone who has inherited or will inherit property. It shows that even if you didn’t pay money to acquire the property, its value matters when it comes to tax calculations.
The ruling sets a precedent (a legal standard), which means that similar cases in the future will likely follow this decision. This is a major shift from KRA’s past approach.
In Conclusion
This ruling on the Daljit Singh Dhanjal case has opened the door for fairer treatment of inherited property in Kenya. The acquisition cost matters because it directly impacts how much CGT you’ll pay when you sell inherited property. Thanks to this landmark decision, future taxpayers can now ensure they’re not unfairly taxed, and inherited property can be valued properly during sales.
This case has set a powerful precedent in Kenya’s tax system, reminding both taxpayers and authorities that fairness is the foundation of taxation.
Need help?
We can assess and advise whether your disposed property is subject to capital gains tax.
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We can process a waiver of CGT from KRA on your behalf.
Penned by Joseph Wachira
The author is a senior tax consultant at ClearTax and can be reached via wachira@cleartax.co.ke