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	Estate planning is a critical process for ensuring that your assets, including business interests, are distributed according to your wishes after your passing. In Kenya, the Law of Succession Act (Cap 160) provides the legal framework for managing and distributing estates, whether through a valid will (testate succession) or without one (intestate succession). For business owners, incorporating business assets into a will requires careful consideration to avoid potential tax complications under the Income Tax Act (Cap 470) and other relevant laws. This article explores the process of including business assets in a Kenyan will, the legal requirements under the Law of Succession Act, and the tax implications, offering practical guidance for effective estate planning.
Business assets in Kenya can include a wide range of property, such as shares in a private or public company, partnership interests, sole proprietorship assets, intellectual property, business equipment, real estate used for business purposes, and financial accounts tied to the business. These assets form part of an individual’s estate, which, under Section 3 of the Law of Succession Act, includes all property, rights, and obligations owned by the deceased at the time of death. Including these assets in a will ensures that they are distributed to intended beneficiaries, such as family members, business partners, or other designated persons, in line with the testator’s wishes.
However, business assets often have unique characteristics, such as ongoing operations, shared ownership, or tax obligations, which necessitate careful planning to avoid disputes or financial burdens for beneficiaries. The interplay between the Law of Succession Act and the Income Tax Act is crucial in determining how these assets can be transferred without incurring unnecessary tax liabilities.
<h3 dir="ltr">Legal Framework: Law of Succession Act (Cap 160)</h3>
The Law of Succession Act (Cap 160) governs both testate and intestate succession in Kenya. For business owners who wish to include their business assets in a will, the following provisions are relevant:
1. Capacity to Make a Will
Under Section 5 of the Law of Succession Act, any person who is of sound mind and over the age of 18 can create a valid will. This includes the ability to dispose of all their free property, including business assets, by will. The testator must understand the nature of the will, the extent of their assets, and the legal obligations to provide for dependants, such as spouses and children, to ensure the will’s validity.
2. Requirements for a Valid Will
To be valid under Sections 8 and 11 of the Law of Succession Act, a will must meet specific formalities:
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Written Will: The will must be in writing, signed by the testator or by someone under their direction, and witnessed by at least two competent witnesses who sign in the presence of the testator.
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Oral Will: For estates valued under KES 30,000, an oral will is permissible if made in the presence of two witnesses and the testator dies within three months. However, business assets typically exceed this value, making a written will the standard choice.
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Clarity of Intent: The will must clearly outline how business assets are to be distributed, specifying beneficiaries and any conditions for transfer, such as shares being transferred to a specific partner or sold to settle debts.
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3. Forced Heirship and Dependant Provisions
Under Section 26 of the Law of Succession Act, Kenyan law includes a forced heirship regime, which allows dependants (e.g., spouses, children, or other close relatives) to challenge a will if they are unfairly excluded. For business owners, this means that excluding dependants from inheriting business assets could lead to legal challenges. Courts may intervene to ensure reasonable provision for dependants, potentially altering the distribution of business assets.
4. Executor’s Role
The testator must appoint an executor in the will to manage the estate, including business assets, after their death. The executor applies for a Grant of Probate under Section 53 of the Law of Succession Act, which authorizes them to administer the estate according to the will. For business assets, the executor’s responsibilities include valuing the assets, settling any debts or taxes, and transferring ownership to beneficiaries.
5. Intestate Succession
If a business owner dies without a valid will, their estate, including business assets, is distributed according to the intestacy provisions of the Law of Succession Act. Section 35 outlines that a surviving spouse is entitled to personal and household effects and a life interest in the residue of the estate, with the remainder distributed to children. In polygamous families, Section 40 mandates distribution based on the number of children per household. This can complicate the management of business assets, especially if the business is to continue operating or if beneficiaries disagree on its management.
<h3 dir="ltr">Incorporating Business Assets into a Will</h3>
To effectively include business assets in a Kenyan will, consider the following steps:
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Identify and Document Assets: Compile a comprehensive inventory of all business assets, including shares, equipment, real estate, intellectual property, and financial accounts. Specify whether these are personally owned or held through a legal entity, such as a company or partnership.
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Specify Distribution: Clearly outline how each asset should be distributed. For example:
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Shares in a Company: Indicate whether shares should be transferred to a specific beneficiary, sold, or held in trust for minor children.
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Partnership Interests: Address how partnership interests will be handled, considering any partnership agreements that may dictate buyout or transfer terms.
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Sole Proprietorship: Specify whether the business should be sold, transferred to a beneficiary, or wound up.
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Consider Business Continuity: If the business is to continue operating, appoint a competent executor or trustee with business acumen to manage or oversee operations until the transfer is complete. Alternatively, establish a trust under the Trustees (Perpetual Succession) Act (Cap 164) to hold business assets for beneficiaries, ensuring continuity and professional management.
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Address Dependants: To avoid challenges under Section 26, ensure that dependants are reasonably provided for, either through business assets or other estate components. For example, a spouse could receive a life interest in business income, while children inherit shares.
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Seek Legal Advice: Engage a qualified lawyer to draft the will, ensuring compliance with the Law of Succession Act and addressing any complexities related to business assets. A lawyer can also advise on structuring the estate to minimize tax liabilities.
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<h3 dir="ltr">Tax Implications Under the Income Tax Act (Cap 470)</h3>
While the Law of Succession Act governs the distribution of assets, the Income Tax Act (Cap 470) and other tax laws determine the tax implications of transferring business assets through a will. Below are key considerations:
1. No Inheritance Tax in Kenya
Kenya does not impose an inheritance tax or estate duty on assets transferred through a will or intestate succession. This means that beneficiaries receiving business assets, such as shares or property, do not face direct taxation on the inherited assets at the time of transfer. However, other taxes may apply depending on the nature of the assets and their subsequent use.
2. Capital Gains Tax (CGT)
Under Section 3(2)(f) of the Income Tax Act, capital gains tax applies to gains derived from the sale or transfer of property, including business assets like real estate or shares. However, transfers of property through a will or intestate succession are generally exempt from CGT under Section 4(1)(b), as they are not considered taxable disposals. This exemption applies provided the transfer occurs as part of the estate administration process.
However, if the executor or beneficiaries sell the inherited business assets (e.g., selling company shares or business property), CGT may apply. The current CGT rate in Kenya is 15% of the net gain, calculated as the difference between the sale price and the adjusted cost base of the asset. To minimize CGT:
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Document the Cost Base: Ensure proper documentation of the original acquisition cost of business assets to establish the cost base for future sales by beneficiaries.
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Plan Asset Transfers: If the business is to be sold post-inheritance, consider structuring the transfer to minimize taxable gains, such as transferring shares to a trust rather than selling them immediately.
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3. Income Tax on Business Income
If the business continues to generate income after the testator’s death (e.g., through dividends, rental income from business property, or operational profits), this income may be subject to income tax under the Income Tax Act. The executor is responsible for filing tax returns for the estate during administration. Key considerations include:
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Corporate Income Tax: If the business is a company, it is taxed at the corporate rate of 30% for resident companies or 37.5% for non-resident companies with a permanent establishment in Kenya, as per Section 3(2)(a) of the Income Tax Act.
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Personal Income Tax: If business income (e.g., dividends or partnership profits) is distributed to beneficiaries, it is taxed at individual income tax rates, ranging from 10% to 30% depending on the income bracket.
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To mitigate income tax liabilities:
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Use Trusts: Establishing a trust to hold business assets can defer income distribution, allowing income to accumulate tax-free within the trust until distributed.
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Life Interest for Spouses: Granting a surviving spouse a life interest in business income can delay taxation until the income is distributed to other beneficiaries.
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4. Stamp Duty
Under the Stamp Duty Act (Cap 480), stamp duty may apply to the transfer of certain business assets, such as land or property, during estate administration. However, transfers of property through a will or intestate succession are generally exempt from stamp duty under Section 18(1) of the Stamp Duty Act, provided the transfer is to a beneficiary entitled under the will or intestacy laws. If the executor sells business property to settle debts or distribute proceeds, stamp duty may apply at rates of 1% to 4% of the property’s market value, depending on its location.
5. Tax on Business Entities
If the business is structured as a company or partnership, additional tax considerations arise:
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Companies: Shares transferred to beneficiaries are not subject to tax at the time of inheritance. However, if the company is sold or liquidated, CGT or corporate income tax may apply.
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Partnerships: Partnership interests transferred through a will are treated as part of the estate, with no immediate tax liability. However, if the partnership continues, income distributed to beneficiaries is subject to personal income tax.
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6. Tax Planning Strategies
To minimize tax complications when including business assets in a will:
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Regular Valuation: Conduct regular valuations of business assets to establish their market value for estate planning purposes, aiding in accurate distribution and tax calculations.
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Trust Structures: Use trusts under the Trustees (Perpetual Succession) Act (Cap 164) to hold business assets, providing flexibility in management and potential tax deferral.
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Succession Planning: Develop a business succession plan alongside the will, addressing how the business will be managed or sold, and incorporate tax-efficient strategies, such as transferring shares to a holding company.
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Professional Advice: Consult tax and legal professionals to structure the estate in a tax-efficient manner, ensuring compliance with both the Law of Succession Act and the Income Tax Act.
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<h3 dir="ltr">Practical Considerations for Business Owners</h3>
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Business Structure: The legal structure of the business (e.g., sole proprietorship, partnership, or company) affects how assets are transferred. For example, a sole proprietorship’s assets are personal property, while a company’s shares are distinct from its underlying assets.
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Partnership Agreements: If the business is a partnership, review any partnership agreements for clauses on death or succession, as these may override the will’s provisions.
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Minority Shareholders: In companies with multiple shareholders, consider buy-sell agreements to ensure smooth transfer of shares without disrupting operations.
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Debts and Liabilities: Ensure the will addresses how business debts will be settled, as these must be paid before assets are distributed to beneficiaries.
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Dispute Prevention: Clearly document the distribution of business assets to avoid disputes among beneficiaries, especially in family businesses where emotional and financial interests may conflict.
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<h3 dir="ltr">Conclusion</h3>
Including business assets in a Kenyan will is entirely feasible under the Law of Succession Act (Cap 160), provided the will is valid and complies with legal formalities. By carefully identifying assets, specifying their distribution, and addressing dependant provisions, business owners can ensure their wishes are honored. While Kenya does not impose inheritance tax, careful planning is required to manage potential capital gains tax, income tax, and stamp duty implications under the Income Tax Act (Cap 470) and other tax laws. Using trusts, seeking professional advice, and integrating business succession planning can minimize tax complications and ensure a smooth transfer of assets.
For personalized guidance on including business assets in your will or navigating tax implications, contact us at +254 716 808 104 or info@lawguide.co.ke to schedule a consultation with our experienced legal team.
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