Capital Gains Tax Accrues on Completion Not Registration of Sale

Case Study: Commissioner of Legal Services and Board Coordination v Weru (Income Tax Appeal E001 of 2025) [2026] KEHC 2456 (KLR) (Commercial and Tax) (26 February 2026) (Judgment)

Background Facts

Transaction: The Respondent sold a property (LR No. 37/244/10) to Nairobi Islamic Charitable WAKF Registered Trustees.

Completion: She received the full purchase price and relinquished ownership on 3rd November 2022. She self-assessed and paid Capital Gains Tax (CGT) at the old rate of 5% on 20th December 2022.

Registration: The formal transfer of the property was registered on 14th February 2023.

Dispute: The Kenya Revenue Authority (KRA) issued an additional tax assessment, arguing that because the registration occurred in 2023, the new CGT rate of 15% (effective 1st January 2023, per the Finance Act, 2022) should apply. This would mean the taxpayer owed an extra Kshs. 3,860,701.

Tax Appeals Tribunal (TAT): The TAT ruled in favor of the taxpayer, setting aside the KRA’s demand. The KRA then appealed to the High Court.

Key Legal Issues and High Court Findings

The High Court dismissed the KRA’s appeal and upheld the TAT’s decision. The court’s reasoning focused on the following points:

1. When does the gain “accrue” for CGT purposes?

• KRA’s Argument: The tax point is the date of registration of the transfer (in this case, 2023), so the 15% rate applies.
• Court’s Finding: The court held that Capital Gains Tax is a tax on a “realized gain.” The gain accrues at the point of completion of the sale—when the seller receives the money and relinquishes beneficial ownership—not at the later, formal act of registration. Since the transaction was completed in November 2022, the gain accrued in 2022, and the 5% rate was correctly applied.

2. Retrospective Application of Tax Laws

• Court’s Finding: Applying the new 15% rate to a transaction completed in 2022 would amount to retrospective taxation. The Finance Act, 2022 explicitly stated the new rate took effect on 1st January 2023. Tax laws are interpreted strictly, and there is no provision to apply this higher rate to a gain already realized and taxed in the previous year. The court stated this would violate the constitutional principles of certainty and fairness in taxation.

3. Reliance on the Law Society of Kenya v KRA [2017] Case

• KRA’s Argument: The Tribunal erred by relying on Paragraph 11A of the Eighth Schedule, which was declared unconstitutional in the LSK case.
• Court’s Finding: The court clarified that the LSK case only struck down the requirement to pay CGT before registration. It did not invalidate the entire CGT framework or define registration as the sole point when a gain “accrues.” The Tribunal was correct to interpret the LSK decision contextually and focus on the substance of when the gain was realized, rather than the procedural formality of registration.

Conclusion

The High Court found that the KRA’s appeal raised no pure question of law to warrant interference. The taxpayer had realized the gain and complied with the law applicable at the time of the transaction.

Final Orders:

1. The KRA’s appeal was dismissed.
2. The judgment of the Tax Appeals Tribunal was upheld.
3. The KRA was ordered to pay the costs of the appeal.