Capital Gains Tax is not payable by a Chargee when exercising its Statutory Power of Sale

Background

The Court of Appeal (COA) earlier this year delivered a judgement that a Chargee is not required to pay capital gains tax (CGT) on disposition of property when exercising its statutory power of sale.

Summary of the facts – The High Court Proceedings

The case arose from a matter filed by the Kenya Bankers Association (KBA) challenging the decision of the Kenya Revenue Authority (KRA) on the proposed simultaneous payment of Stamp Duty and capital gains tax while undertaking transfers of properties. What this meant was that the I-tax system would not permit the payment of Stamp Duty unless CGT was paid. KBA instituted Judicial Review proceedings challenging the decision by KRA.

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 by the Chargee to produce an acknowledgement number for payment of CGT.

The Appeal

KRA appealed the decision of the High Court to the Court of Appeal (COA). On hearing the appeal, COA ruled that a Chargee does not become an owner of the property secured by a Charge simply by the Chargor being unable to pay its obligations under the Charge.

Additionally, the COA held that a Chargee does not become a proprietor of the land and as such placing the Chargor and Chargee on equal footing will blur the distinction between a Chargor and a Chargee. COA held that 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.

Commentary

This decision clarifies the role of a Chargee in a land transaction specifically when exercising its statutory power of sale in relation to the tax obligations that arise.

If you have any inquiries relating to the above or land transactions generally, do not hesitate to contact Dennis W.Muhindi on dmuhindi@mwc.legal. Please note that this e-alert is meant for general information only and should not be relied on without seeking specific subject matter legal advice.