A man inherited land from his father. Paid zero shillings for it. Sold it years later for Ksh 177 million. And KRA told him he owed Capital Gains Tax on every single shilling of that sale price.
He refused to accept it. He took the case to the Tax Appeals Tribunal. And what the Tribunal decided changed how inherited property is taxed in Kenya.
But here’s the part most people don’t know: Parliament then added a rule that can wipe out every benefit the courts established — depending on one single factor. We’ll get to that shortly.
If you have inherited property — or you advise clients who have — this is the most important tax framework you need to understand right now.
The Assumption That Has Cost Kenyans Millions
Most people who inherit property assume their acquisition cost is zero — because they didn’t pay anything for it. That assumption leads to one terrifying conclusion: KRA will tax you on the full sale price when you eventually sell.
Until recently, even tax professionals disagreed on this. And KRA itself argued the “zero cost” position in court — repeatedly.
The good news: the law has now settled this. Two court rulings and one Finance Act amendment have created a clear, predictable framework. But only if you know about it, plan ahead, and document everything correctly.
Best Guide to Capital Gains Tax in Kenya
Case 1: The Shah Case — The Ruling That Established the Rebasing Principle
In 2015, three siblings inherited two parcels of land from their deceased father. They engaged Knight Frank, an independent valuer, who determined the total market value of the properties at the time of inheritance to be Ksh 389,619,600.
Five years later, in 2020, they sold the properties to a development company for Ksh 305,584,000 — below the inherited value. Based on that inherited valuation and various adjusted costs, they declared a loss and paid zero CGT.
KRA disagreed. Their position: “You paid nothing for this land. Your acquisition cost is zero.” KRA issued an assessment demanding CGT of Ksh 27,728,475.
The siblings took the matter to the Tax Appeals Tribunal, and then to the High Court. The court examined Paragraph 9 of the Eighth Schedule to the Income Tax Act, which provides that where property is acquired otherwise than by way of an arm’s length bargain, the transfer is deemed to have taken place at the open market value of the property at the time of acquisition.
| The Ruling (24th June 2024): The High Court upheld the Tribunal’s decision and confirmed: when you inherit property, your cost base is the market value at the date of inheritance — not zero. This is now binding precedent in Kenya. It is called the “rebasing principle.” |
Because the siblings’ sale price was lower than their inherited market value, they owed no CGT whatsoever.
Ultimate Guide to Rental Income Tax in Kenya
Case 2: The Dhanjal Case — Reinforcing the Principle and Clarifying Valuations
In 2014, Daljit Singh Dhanjal inherited a piece of land from his father. He obtained a valuation pegging the land’s value at Ksh 150,000,000 at the time of inheritance.
In 2022, he sold the land for Ksh 177,915,900. He filed his CGT return using the Ksh 150 million as his acquisition cost, added incidental costs of Ksh 6,913,814, and declared a gain of approximately Ksh 21 million.
KRA disallowed the entire Ksh 150 million cost. The argument was the same: since Dhanjal inherited the land, he didn’t pay for it, so his cost was zero. That would have meant CGT on the full Ksh 177 million sale proceeds.
He objected and took the case to the Tax Appeals Tribunal. The Tribunal examined Paragraph 6(2)(d) of the Income Tax Act, which exempts transfers to legatees during estate administration from CGT. KRA had argued this exemption meant no acquisition occurred at all.
The Tribunal disagreed. It held that the exemption from CGT upon inheritance does not negate the fact that an acquisition took place. The market value at inheritance remains the default cost base.
| Key clarification from the Dhanjal case: Third-party valuation reports carry substantial evidentiary weight in establishing your cost base. The report you commission from a registered valuer at the time of inheritance is not a formality. It is your legal shield if KRA ever challenges your CGT return. |
Ultimate Guide to Monthly Residential Taxation of Rental income in Kenya
The Finance Act 2023 Twist: The Five-Year Rule That Changes Everything
Just as the law appeared settled, Parliament stepped in. The Finance Act 2023 introduced Paragraph 4A into the Eighth Schedule of the Income Tax Act — and it created a five-year anti-avoidance rule that fundamentally alters the calculation.
The rule in plain language: if you inherit property and sell it within five years of inheriting it, you cannot use the rebased market value as your acquisition cost. You must step into the shoes of the deceased and use whatever they originally paid for the property. If you sell after five years, you get to use the rebased market value at the date of inheritance.
A Simple Illustration
A father acquires property in 1995 at a cost of Ksh 2 million. He passes away in 2024. At the time of his death, the property is worth Ksh 20 million and is transmitted to his son.
Scenario A: Son sells in 2026 (within five years)
CGT is calculated using the father’s original acquisition cost of Ksh 2 million. The taxable gain is massive.
Scenario B: Son sells in 2030 (after five years)
CGT is calculated using the rebased market value of Ksh 20 million. The taxable gain shrinks dramatically.
Same property. Same eventual sale price. The difference between those two decisions can be millions of shillings in tax liability.
The five-year rule exists to prevent abuse. Without it, a person could transfer property to a relative shortly before death, and the beneficiary could immediately sell using a stepped-up cost base equal to current market value, wiping out any taxable gain. Parliament closed that loophole by requiring a genuine five-year holding period before the rebasing benefit becomes available.
What You Should Do If You Have Inherited Property
- 1. Get a professional valuation immediately upon inheritance.
That valuation report becomes your cost base if you sell after five years. Keep it permanently — do not lose it.
- 2. Wait at least five years before selling if you possibly can.
The tax savings are not marginal. They can be life-changing, especially where the deceased acquired the property decades ago at very low historical prices.
- 3. Keep every receipt.
Succession costs, legal fees, transmission expenses, any post-inheritance improvements — all of these can be added to your adjusted cost, reducing your taxable gain further.
- 4. Never assume your cost is zero.
That single mistake has cost Kenyan property owners millions in unnecessary tax and penalties. You now have two High Court-backed rulings protecting you. Use them.
The Filing Deadline You Cannot Miss
There is one more trap that catches many beneficiaries off guard: the CGT filing deadline.
You must file your CGT return and pay the tax within 30 days of transferring the property. Miss that window and you are looking at a 20% penalty on the tax due, plus 1% interest per month on the unpaid balance.
People who win on the rebasing argument but miss the deadline often end up paying almost as much in penalties as they saved on the gain. Do not wait until the last minute. Engage a tax professional before you sign the transfer documents — not after.
The Three-Part Framework: A Summary
| The Shah Case (High Court, 2024): Established the rebasing principle. When you inherit property, your cost base is the market value at the date of inheritance — not zero. The Dhanjal Case (Tax Appeals Tribunal): Reinforced the rebasing principle and confirmed that third-party valuation reports carry substantial evidentiary weight as proof of your cost base. Finance Act 2023 — Paragraph 4A: Introduced the five-year rule. Sell within five years and you use the deceased’s original cost. Sell after five years and you use the rebased market value at inheritance. |
These three developments work together to create a system that is fair to beneficiaries while protecting the tax base. The law is now settled. But it only works in your favour if you plan ahead, get the right valuation, hold the property for the right period, and file on time.
If you have inherited property and are considering a sale, consult a qualified tax professional who can help you calculate your true gain and file your CGT return correctly. A little planning today can save you millions tomorrow.
This article is for informational purposes only and does not constitute legal or tax advice. Consult a qualified tax professional for advice specific to your situation.
