Capital Gains Tax on inherited land building Kenya

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? How is that inheritance taxed in Kenya? This question is at the heart of the Daljit Singh Dhanjal vs Kenya Revenue Authority (KRA) case, a game-changing legal battle that has transformed how taxes are calculated on inherited property.

The Story Behind this Case

Daljit Singh Dhanjal inherited a piece of land from his father in 2014. A few years later, in 2022, he sold that land for Kshs. 177.9 million. 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 million.

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 million 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 net effect is either a profit or a loss. 

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 2014. 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.

But let's go back to the case before you tell me maths was not meant for everyone... 😄

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.

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.