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Impact of The Finance Bill 2025 on Property Taxes

The Kenya Finance Bill 2025 has sparked widespread discussion due to its proposed tax changes, particularly those affecting the real estate sector. As a critical component of the government’s fiscal strategy, the bill introduces measures that could reshape property transactions, ownership costs, and investment decisions. This article explores the proposed changes to property taxes, including stamp duty, land rates, and other levies, while addressing public concerns about their potential impact on affordability, market dynamics, and economic growth.

IThe Bill aims to boost government revenue to fund public services and infrastructure. The bill proposes amendments to various tax laws, including the Income Tax Act, Value Added Tax (VAT) Act, and Stamp Duty Act. For the real estate sector, key changes target property taxes, transaction costs, and incentives for developers and homeowners. While some measures offer relief, others have raised concerns about increased costs for property owners, buyers, and developers.

Proposed Changes to Property Taxes

1. Stamp Duty Adjustments

Stamp duty is a tax levied on legal documents, primarily those related to property transfers, and is payable by the buyer based on the property’s market value or purchase price (whichever is higher). The Finance Bill 2025 does not explicitly propose a nationwide increase in stamp duty rates, which remain at 4% for properties within urban municipalities and 2% for rural areas. However, recent directives from the Ministry of Lands have expanded the scope of urban areas subject to the 4% rate, following the gazettement of new municipalities in April 2024.

Public Concern: Many Kenyans worry that the reclassification of rural areas as urban municipalities will effectively increase stamp duty costs for properties previously taxed at 2%. For example, a property valued at Kshs. 5 million in a newly gazetted urban area would now incur Kshs. 200,000 in stamp duty, up from Kshs. 100,000. This change could discourage property transactions in these areas, particularly for middle-income buyers.

Impact on Transactions: Higher stamp duty may reduce liquidity in the property market, as buyers face increased upfront costs. Investors in newly urbanized areas, such as Nakuru, Kiambu, and Kisumu, may delay purchases or seek rural properties to avoid the 4% rate. However, exemptions remain for certain transactions, such as transfers between spouses, family property transfers upon demise, or to companies wholly owned by the same family.

2. Land Rates and County Taxation

Land rates, imposed by county governments under the Rating Act, are taxes on land ownership within municipalities or townships to fund services like water, sanitation, and sewerage. The Finance Bill 2025 indirectly impacts land rates by supporting county governments’ efforts to revalue land for taxation purposes, especially in newly gazetted urban areas. This could lead to higher land rates as counties align valuations with current market prices.

Public Concern: Property owners fear that upward revaluations will significantly increase annual land rates, particularly in fast-growing urban centers like Nairobi, Mombasa, and Eldoret. For instance, a plot previously valued at Kshs. 2 million might be revalued at Kshs. 4 million, doubling the annual rates payable. This could strain landlords and homeowners, potentially leading to higher rents or property sales to offset costs.

Impact on Transactions: Higher land rates may deter long-term property investments, as holding costs rise. Developers may also pass increased rates onto buyers, raising the cost of new housing units. However, the bill’s proposal to streamline county revenue collection through digital platforms like e-Citizen could improve transparency and compliance, reducing disputes over rate assessments.

3. Introduction of a Property Tax

A notable proposal in the Finance Bill 2025 is the introduction of a 0.3% annual property tax on the value of immovable property, applicable to both residential and commercial properties. This tax would be collected by the Kenya Revenue Authority (KRA) and is intended to broaden the tax base.

Public Concern: The proposed property tax has sparked significant backlash, with fears that it will add to the already high cost of property ownership. For a property valued at Kshs. 10 million, the annual tax would be Kshs. 30,000, a recurring cost that could burden middle-class homeowners and small-scale landlords. Critics argue that this tax, combined with existing land rates, amounts to double taxation.

Impact on Transactions: The property tax could reduce demand for high-value properties, as investors recalculate returns on rental income or capital appreciation. First-time buyers and low-income households may be less affected, as the bill retains exemptions for affordable housing schemes, but the broader market could see slower transaction volumes.

4. Capital Gains Tax (CGT) Modifications

Capital gains tax, currently at 15% on net gains from property sales, is another area of focus. The Finance Bill 2025 proposes tightening rules for CGT exemptions, particularly for group restructurings. Previously, internal group transfers were exempt if no third party was involved, but the bill requires groups to have existed for at least 24 months to qualify. Additionally, the bill introduces CGT for properties transferred in non-taxable transactions and sold within five years, using the original adjusted cost.

Public Concern: Investors and businesses worry that these changes will increase tax liabilities for property portfolios held within corporate structures. The five-year rule could also discourage speculative sales, as sellers may delay transactions to avoid CGT.

Impact on Transactions: The tightened CGT rules may reduce property flipping, stabilizing prices but potentially limiting market activity. Long-term investors may benefit from holding properties longer, but short-term traders could face higher costs, impacting liquidity in certain market segments.

5. VAT on Construction Materials

The bill proposes a 16% VAT on construction materials, reversing previous exemptions for affordable housing projects. This change, combined with the removal of tax incentives for large-scale developers, could increase construction costs.

Public Concern: Developers and homebuyers are concerned that higher material costs will lead to more expensive housing units, undermining Kenya’s affordable housing agenda. Small-scale developers, in particular, may struggle to absorb these costs, potentially exiting the market.

Impact on Transactions: Increased construction costs could slow the supply of new properties, driving up prices in urban areas with high demand. Buyers may turn to existing properties, intensifying competition and further inflating prices.

6. Tax Relief for Residential Construction

On a positive note, the Finance Bill 2025 offers tax relief on interest paid on loans for constructing residential homes. This measure aims to encourage individual homeownership and stimulate construction activity.

Public Concern: While welcomed, some Kenyans question the accessibility of this relief, as it benefits those with access to formal loans, excluding many low-income earners who rely on informal financing.

Impact on Transactions: The relief could boost demand for residential plots and construction services, particularly among middle-income earners. However, its overall impact may be limited unless paired with broader financing reforms.

Broader Implications for the Real Estate Sector

The Finance Bill 2025’s tax proposals could have far-reaching effects on Kenya’s real estate market:

  • Affordability Challenges: Higher stamp duty, land rates, and the new property tax may make property ownership less affordable, particularly for first-time buyers and middle-income households. This could widen the housing deficit, estimated at 2 million units annually.

  • Market Slowdown: Increased transaction costs and taxes may reduce property sales, particularly in urban areas. Investors may adopt a wait-and-see approach, pending clarity on the bill’s final provisions.

  • Shift to Rural Markets: Buyers and investors may gravitate toward rural properties to avoid higher stamp duty and land rates, potentially spurring development in less urbanized counties.

  • Developer Challenges: The removal of incentives and VAT exemptions could squeeze developers’ margins, leading to fewer projects or higher prices. Small-scale developers may be disproportionately affected, reducing market competition.

  • Economic Impact: Real estate contributes significantly to Kenya’s GDP (approximately 13.8% in 2024). A slowdown in transactions could dampen economic growth, affecting related sectors like construction, finance, and retail.

Addressing Public Concerns

To mitigate public concerns, the government could consider the following:

  1. Public Participation: Engaging stakeholders through forums and consultations, as mandated before the bill’s assent by July 1, 2025, could refine contentious provisions.

  2. Phased Implementation: Gradually introducing taxes like the 0.3% property tax could ease the financial burden on property owners.

  3. Targeted Exemptions: Expanding exemptions for low-income homeowners or small-scale investors could protect vulnerable groups.

  4. Transparency in Valuations: Clear guidelines for land revaluations and rate assessments would reduce disputes and build trust in county taxation systems.

  5. Support for Affordable Housing: Reinvesting property tax revenue into affordable housing projects could address public criticism of the bill’s impact on homeownership.

Conclusion

The Finance Bill 2025 presents a mixed bag for Kenya’s real estate sector. While measures like tax relief on residential construction loans offer hope, increased stamp duty, land rates, and the new property tax could raise costs for buyers, owners, and developers. Public concerns about affordability and double taxation highlight the need for balanced reforms that support revenue goals without stifling market growth. As the bill undergoes review, stakeholders must advocate for policies that promote a vibrant, inclusive property market. Kenyans are advised to stay informed, leverage platforms like Ardhisasa and iTax for compliance, and consult tax advisors to navigate the evolving landscape.

Contact us at +254 716 708 104 or info@lawguide.co.ke for expert advice.