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Treasury mulls tax on Home Ownership Savings Plans

By Wahinya Henry
Thursday, May 21st, 2020
A house under construction at Victory Gardens, an Optiven Limited project in Kitengela. Photo/PD/TIMOTHY NJENGA

Treasury is seeking to introduce the taxation of Home Ownership Service Plans (Hosps) through the 2020 Finance Bill.

The bill proposes to remove the tax relief available to individuals who are saving to own a house under Hosp.

The proposal tabled in the National Assembly by Treasury Cabinet Secretary Uktur Yattani seeks to delete Section 22C of the Income Tax Act, which allows a tax deduction on Hosp contributions up to a limit of Sh96,000 per year.

The bill proposes to subject tax income earned by financial institutions, fund managers, investment banks and building societies with respect to Hosp deposits.

Section 22C of the Income Tax Act currently exempts interest income earned by a depositor on such deposits up to a maximum of Sh3 million. 

An analysis by audit firm KPMG says the move will reduce the income available for distribution to depositors as interest, negatively impacting their ability to purchase homes.

The current regime provides an incentive for first-time homebuyers, which is in line with the government’s Big Four Agenda.

The proposal to subject the Hosp income to tax was first introduced through the Tax Laws (Amendment) Bill, 2020 in March 2020, but was rejected by the National Assembly on the basis that it would discourage savings for investment into the housing sector, undermining the efforts by government to promote affordable housing.

Treasury Acting Cabinet secretary Ukur Yattani.

According to PwC, the proposed changes will discourage homeownership savings, forcing potential homeowners to shift to loans that are still eligible for mortgage relief.

Hosps were introduced in Kenya in 1995 and operate as tax-sheltered savings plans created to enable depositors save for home acquisition or development.

The Finance Bill also proposes to increase from Sh10 million to Sh15 million the upper limit for the residential income subject to the 10 per cent tax rate.

The limit was introduced in 2016 for persons with rental earnings between Sh144,000 and Sh10 million per year. 

KPMG said the change on rental tax will be a welcome relief for landlords who are under pressure to lower or defer rent. 

Tax experts say some of the proposed laws  on Capital Gains Tax under the Tax Laws (Amendment) Bill, 2020 would adversely affect the real estate industry.

First, the bill proposes to abolish two key exemptions on capital gains tax (CGT) from the First Schedule to the Income Tax Act.

The bill also proposes to overhaul the investment allowances regime under the current Income Tax Act.  

“It would be better for the State to pass the emergency measures intended to mitigate the effects of Covid-19 first, and to expose the far-reaching tax measures to adequate public participation as required by the Constitution of Kenya,” said Legal firm Anjarwalla & Khanna. 

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