Imagine inheriting a piece of land from your parent without paying a single shilling. Years later, you sell it for Ksh 12 million. The excitement quickly turns to worry: Will the Kenya Revenue Authority (KRA) tax the entire sale proceeds as a gain because your acquisition cost was zero? For years, this question divided taxpayers and even some tax professionals. Thanks to two landmark court decisions and changes introduced by the Finance Act 2023, the law now provides clarity. Beneficiaries are not stuck with a zero cost base, but timing and documentation matter greatly.
The Shah Case: Establishing the Rebasing Principle
In 2015, three siblings inherited two parcels of land from their father. An independent valuation by Knight Frank pegged the market value at Ksh 389,619,600. They sold the properties in 2020 for Ksh 305,584,000, declaring a capital loss of about Ksh 99 million after adjusting for costs and thus no Capital Gains Tax (CGT) liability.
KRA disagreed, arguing that since the siblings paid nothing, their acquisition cost was zero, triggering CGT of Ksh 27,728,475 on the full proceeds. The matter reached the Tax Appeals Tribunal, which examined Paragraph 9 of the Eighth Schedule to the Income Tax Act. This paragraph states that where property is acquired otherwise than by an arm’s length bargain (such as inheritance), the transfer is deemed to occur at the open market value at the time of acquisition.
The Tribunal ruled in favour of the siblings, allowing the market value at inheritance as the cost base. KRA appealed to the High Court, but on 24 June 2024, the Court upheld the Tribunal’s decision in Commissioner of Domestic Taxes v Shah & 2 others. This established the “rebasing principle”: upon inheritance, the beneficiary’s cost base for future CGT calculations is the market value of the property at the date of inheritance, not zero. Because the sale price was lower than the rebased value, no CGT was due.
The Dhanjal Case: Reinforcing Valuations and Acquisition
A second case strengthened this position. In 2014, Daljit Singh Dhanjal inherited land from his father and obtained a professional valuation of Ksh 150 million. He sold it in 2022 for Ksh 177,915,900, declaring a modest gain after deducting the Ksh 150 million plus incidental costs.
KRA disallowed the acquisition cost, insisting on taxing nearly the entire proceeds since no payment was made at inheritance. Dhanjal appealed to the Tax Appeals Tribunal. The Tribunal affirmed that inheritance qualifies as an acquisition, even if exempt from CGT at the time of transfer under provisions like Paragraph 6(2)(d) of the Income Tax Act (covering transfers to legatees during estate administration). It held that the exemption does not erase the acquisition event.
Crucially, the Tribunal placed significant weight on the third-party valuation report, ruling that the market value at inheritance serves as the default cost base for stamp-duty-exempt inheritances. Dhanjal’s appeal was allowed, confirming beneficiaries can use a professional valuation as their acquisition cost.
The Finance Act 2023: The Five-Year Anti-Avoidance Rule
Just as the rebasing principle seemed settled, Parliament introduced safeguards. The Finance Act 2023 inserted Paragraph 4A into the Eighth Schedule. Where property is acquired in a non-CGT transaction (e.g., inheritance) and then sold in a taxable transaction within five years, the adjusted cost for CGT reverts to the original adjusted cost in the hands of the previous owner (typically the deceased’s historical purchase price), not the market value at inheritance.
If sold after five years, the beneficiary benefits from the rebased market value at the date of inheritance.
Simple Illustration:
A father bought land in 1995 for Ksh 2 million. At his death in 2024, it is worth Ksh 20 million and passed to his son.
– Sale in 2026 (within 5 years): CGT uses the father’s Ksh 2 million cost base = potentially large taxable gain.
– Sale in 2030 (after 5 years): CGT uses the Ksh 20 million rebased value = much smaller or no gain.
This rule prevents abuse, such as gifting or bequeathing property shortly before a sale to “step up” the cost base and eliminate gains accumulated over decades.
Practical Lessons for Beneficiaries
1. Obtain a professional valuation immediately upon inheritance and safeguard the report. It forms the foundation of your cost base after five years.
2. Consider holding for at least five years before selling, especially if the deceased acquired the property long ago at a low cost. The tax savings can be substantial.
3. Document all costs: Include succession expenses, legal fees, transmission costs, and any post-inheritance improvements or enhancements. These increase your adjusted cost and reduce the taxable gain.
4. Never assume zero cost: Court precedents have firmly rejected this position.
5. Meet strict deadlines: CGT returns and payment are due within 30 days of the transfer (earlier of full purchase price receipt or registration of transfer). Late payment incurs a 20% penalty plus 1% monthly interest.
CGT is charged at 15% on the net gain (sale price minus adjusted cost and allowable deductions)
The legal framework for CGT on inherited property is now clearer and more predictable. The Shah case (2024) firmly established the rebasing principle using Paragraph 9 of the Eighth Schedule. The Dhanjal case reinforced the evidentiary value of independent valuations. The Finance Act 2023’s five-year rule in Paragraph 4A balances fairness to beneficiaries with protection of the tax base against avoidance.
If you hold inherited property, act proactively: value it early, retain records, plan your sale timeline, and consult a qualified tax advisor or lawyer. Proper planning and documentation can save millions in tax, penalties, and disputes. Kenya’s tax system now offers a structured path, one that rewards foresight rather than punishing inheritance.
This article is provided free of charge for information purposes only; it does not constitute legal advice and should be relied on as such. No responsibility for the accuracy and/or correctness of the information and commentary as set in the article should be held without seeking specific legal advice on the subject matter. If you have any query regarding the same, please do not hesitate to contact us vide info@mnadvocates.co.ke
