Tax Reliefs Accessible to Registered Family Trusts in Kenya

Family trusts in Kenya have emerged as a powerful mechanism for estate and succession planning, enabling individuals to safeguard and transfer assets efficiently across generations. These legal structures allow a settlor, the person establishing the trust, to transfer property to trustees who manage it for the benefit of designated beneficiaries. Beyond asset protection, family trusts offer several key advantages, including the preservation or creation of wealth across generations, seamless management and distribution of assets during the settlor's lifetime and after their passing, avoidance of the probate process which is often expensive and lengthy, protection of beneficiaries from creditors who might otherwise claim priority from a deceased's estate, and enhanced privacy and confidentiality. Upon the settlor's demise, details of property ownership and dealings remain shielded from public scrutiny.

One of the most compelling incentives for establishing a registered family trust is the array of tax reliefs available, particularly on property transfers. These exemptions primarily cover Stamp Duty and Capital Gains Tax (CGT), with specific provisions under income tax laws. However, recent legislative changes as of 2024 and 2025 have refined these benefits, notably by subjecting trust income to taxation while preserving exemptions on the principal sum. This article explores these tax reliefs in detail, drawing on current Kenyan tax laws, and outlines the process for registering a family trust to access them.

Stamp Duty Exemptions

Stamp Duty is a tax levied on instruments such as conveyances or transfers of property. Under Section 52(2)(b) of the Stamp Duty Act, Cap 480, a conveyance, transfer, or agreement for such, operating as a voluntary disposition of property, is exempt from Stamp Duty if directed to a registered family or charitable trust. This provision facilitates the initial transfer from the settlor to the trust without incurring this cost.

Furthermore, Section 52(6) of the same Act exempts Stamp Duty on transfers of property from the trustee to the beneficiaries of the trust. This ensures that distributions to entitled beneficiaries remain tax-free in this regard. It is worth noting, however, that transfers from the trust to a third party are not exempt and are subject to standard Stamp Duty rates.

These exemptions make family trusts an attractive option for intra-family asset transfers, reducing the financial burden associated with property movements. For instance, when immovable property like land is transferred into the trust, no Stamp Duty applies, provided the trust is duly registered.

Capital Gains Tax (CGT) Exemptions

Capital Gains Tax is imposed on the profit realized from the sale or transfer of property. The Income Tax Act (ITA) provides several exemptions tailored to family trusts, promoting their use in wealth planning.

Paragraph 58 of the First Schedule to the ITA states that CGT is not chargeable on the transfer of immovable property to a family trust. This allows settlors to move real estate assets into the trust without triggering CGT liability.

Additionally, Paragraph 6(2)(g) of the Eighth Schedule to the ITA exempts CGT on transfers from the trust to a beneficiary once they become entitled to the property. Importantly, Kenyan law permits the settlor to also serve as a beneficiary, extending these exemptions to any transfers back to them if applicable.

Paragraph 36(g) of the First Schedule to the ITA further exempts CGT on the transfer or sale of property, including investment shares, when done for the purpose of transferring the title or proceeds into a registered family trust. This broadens the scope to include movable assets like shares, enhancing the trust's utility for diversified portfolios.

These provisions enable CGT deferral or avoidance in family contexts, such as when assets are restructured for succession. However, transfers to third parties from the trust may still attract CGT, depending on the circumstances. Recent analyses confirm these exemptions remain intact under the Tax Laws (Amendment) Act, 2024, with no significant alterations affecting family trusts in this area.

Income Tax Considerations

Income tax applies to all income accrued in or derived from Kenya, as per Section 3 of the ITA, regardless of residency status. For trusts, Section 11 deems trust income as that of the trustee or beneficiary, with specific rules for taxation.

If the trust earns qualifying dividends or interest, these are taxed under dedicated rules, often at lower rates than general income tax. Trustees receiving taxable income treat it as their own for tax purposes. Under Section 11(4), dividends or interest paid to beneficiaries can be designated as qualifying and already taxed, capped at the amount the trustee received in that form.

Beneficiary receipts from the trust, such as payments for school fees, medical expenses, or housing, are treated as their income. If derived from income already taxed at the trustee level, it is considered gross and assumed taxed at the trustee's rate. Paragraph 57 of the First Schedule to the ITA exempts the principal sum of a registered family trust from income tax, protecting the original corpus from taxation.

A critical update stems from the Tax Laws (Amendment) Act, 2024, assented to in December 2024: the income generated by registered family trusts is now subject to taxation, limiting the exemption solely to the principal sum. This change, effective from 2025, means trusts must pay taxes on earnings like rental income or investment returns, potentially reducing some tax advantages. Previously, broader exemptions applied, including up to KES 10 million in beneficiary income annually, but these have been curtailed. Despite this, benefits like income splitting and flexible distributions persist, allowing trusts to optimize tax liabilities through strategic management.

Other Tax Implications and Benefits

Beyond the core taxes, family trusts may interact with other fiscal obligations. For example, transfers between spouses or to immediate family members are exempt from CGT, which can complement trust structures. Trusts also facilitate avoidance of probate taxes and delays, indirectly reducing costs. In some cases, trusts provide asset protection from estate duties and enable foreign ownership benefits for non-residents.

The Finance Act, 2021, initially introduced many of these exemptions to encourage trust formation. Subsequent amendments, including those in 2024, aim to balance revenue needs with incentives, but family trusts remain tax-efficient for wealth preservation.

Procedure for Registering a Family Trust in Kenya

To access these tax reliefs, the trust must be registered. The process involves several steps and is overseen by the Business Registration Service (BRS).

1. Preparation of Trust Deed: Draft a trust deed outlining the settlor, trustees, beneficiaries, assets, and objectives. This document must be stamped and registered under the Registration of Documents Act at the Ministry of Lands.
2. Application for Incorporation: Submit an online application via manual.brs.go.ke using Form TR1. Include a commissioned petition for incorporation.
3. Required Documents: Provide the proposed trust name (ending with "Registered Trustees"), objects of the trust, registered trust deed, statement of donor funding, title deeds or asset ownership proofs, current searches on assets, financial statements, minutes appointing trustees, a brief summary of the trust, CVs of trustees, diagrammatic representation of the common seal, and certified copies of IDs, KRA PINs, and passport photos for settlors, trustees, beneficiaries, and enforcers.
4. Fees and Approval: Pay the requisite fee. The application can be filed by the settlor, trustee, enforcer, or an advocate. Upon approval, the trust gains legal personality.

This process typically takes several weeks, and professional legal assistance is recommended to ensure compliance.

Conclusion

Registered family trusts in Kenya continue to offer substantial tax reliefs, particularly through exemptions on Stamp Duty and CGT for property transfers, despite recent adjustments making trust income taxable. These structures not only minimize tax liabilities but also provide robust tools for asset protection, succession planning, and privacy. As tax laws evolve, such as with the 2024 amendments, staying informed is crucial. Consulting qualified professionals, like those at firms specializing in tax and estate planning, ensures tailored strategies that comply with regulations and optimize benefits.

For personalized advice, contact us on info@lawguide.co.ke or 0716808104 to navigate these opportunities effectively.