Inheritance tax offers State more room to earn revenue

In 1902, a colonial farmer named Fabian Harris Wallis was registered as the owner of a 300-acre parcel of land - registration no LR7381 (LR6406) - situated in Ndaragwa, Laikipia County.

Kenya’s independence heralded a new set of problems that complicated Wallis’s operations, forcing him to move back to his native home. As he had no intentions of holding on to the land, it is said that he decided to donate it.

Two parties: a powerful police commandant in his hey days, and two peasant men who were employees of the farmer claimed to be the bona fide benefactors.

On one side, the two former workers of the white settler — Ndurere Muhunyu and Ithinyai M’narangui — claimed that Wallis had left them the expansive land via a conveyance dated October 23, 1964 while on the other, former police boss Ben Gethi held papers indicating that the land was transferred from Wallis to Meja Gethi in 1971 as a “gift”.

Who the right benefactor was is a matter for the court to decide. But what is obvious is the immense revenue that the government would have earned were it to tax this “gift”.

DEATH TAX

If the above scenario was playing out in the US, where Inheritance tax (also referred to as death tax) is enforced by some states, the benefactor — whether it is Ben Gethi or the two peasant men — would have to pay up to 40 per cent of the land value to the federal government.

If the parcel of land in question was to be valued today, it would round off to Sh150 million, and would attract Sh60 million in inheritance tax if the country adopted the 40 per cent rule that the Americans use.

The late Gerishon Kirima’s real estate empire of 980 acres is modestly valued at Sh750 million.

On his death, the government would have earned Sh300 million in revenue, while the death of former Cabinet minister Njenga Karume would have left the government Sh7 billion richer from his Sh17.5 billion real estate.

REGULATION

Jack Mwimali, a property lawyer and lecturer at Jomo Kenya University of Agriculture and Technology (JKUAT), says taxing the dead is not a new idea.

“Inheritance tax is nothing new and has been practised for decades in many countries. Progressive countries have stopped overtaxing their poor in order to meet their budgetary needs and have devised new ways of getting revenue. Death duty or inheritance tax as it is formally known is one such way,” he says.

If Harris, Kirima and Karume were South Koreans, their benefactors would have had to part with half of their estates: Sh 75 million, Sh375 million and Sh8.75 million respectively, as the country has a 50 per cent inheritance tax rate.

Japan asks for 55 per cent, which is the highest in the world according to Tax Foundation, a global organisation that tracks tax trends.

In Kenya, the journey to institute a proper death duty taxing system has had numerous setbacks, which started 37 years ago when the country enacted the first law on succession matters, the Law of Succession Act (Cap. 160).

LOOPHOLES

This law was enacted with a view of providing guidelines on inheritance matters, and gave stipulations and precedents on what course matters of succession should follow.

According to Pravin Bowry, a lawyer and expert on land and conveyancing matters, the Act had many positive attributes but did not encompass every necessity of succession.

Such necessary aspects of succession, he points out, include intestacy, taxable properties, burial rights, and most importantly estate duty or death duty/ inheritance tax.

Estate duty was part of the initial Act that was abolished in 1985, but according to Bowry, discussion about this Act should be restarted. “It should be revived with an aim of covering all the loopholes that led to its abolishment in the first place,” he argues.

Mwimali agrees, explaining that there is need for a legal framework to guide on this vital subject.

“If a living person is taxed heavily, why shouldn’t a dead man’s property be taxed?” he says, explaining that death duty works on the principal that the benefactor is earning new properties or new income and thus, needs to be taxed the same way salaries and profits are taxed by the government.

THE RICH

Tellingly, the country has had many acts on matters property passed by parliament, but none has raised the issue of reviving death duty, pointing to its unpopularity.

“Yes, it is unpopular, especially with the rich, as they feel such a law is targeting them,” explains Mwimali, adding that there is no inheritance tax, gift tax, estate tax, or wealth tax in Kenya.

Capital gains tax (CGT) - the only duty that came closer to inheritance tax in Kenya - had been suspended for many years and was only reintroduced in 2015 at a rate of five per cent of property value.

The imposition of CGT on property transactions was quickly criticised by tax experts who argued that it did not cushion the poor and small landholders transferring inherited property.

MARKET VALUE

Under this law, inherited property is regarded as a gift and is subjected to the tax capped at five per cent of the difference between selling and buying prices.

Tax experts said there were several issues that need clarifications, such as what would constitute market value in places where hardly any financial transactions take place except through inheritance.

“It is unclear how you arrive at the market value of the land as you have to adjust for costs. We also need further clarification as to what adjustment costs are involved. There are a number of other costs involved in transacting land,” said Nahashon Mathenge, a consultant with PKF Taxation Services.

Mathenge said costs involved in transferring land including stamp duty, legal fees and other professional fees have not been fully catered for in the law.

Such costs are supposed to be subtracted from the value of the property before determining the CGT.

FAIRNESS

Mathenge criticised the law for not being progressive enough, as it treated both the rich and poor sellers in the same manner.

“This law could have made a lot of sense if it taxed the rich people selling properties worth millions of shillings at a higher rate than the poor selling properties of little value. In the UK, the rich pay a higher rate than the poor people,” said Mathenge.

According to Tax Foundation, Mathenge’s sentiments make a lot of sense as various countries make tax exemptions for the poor or properties of low value.