Legal Transfer Date Decides Capital Gains Tax Liability

Case Study: Bhatt v Commissioner of Legal Services and Board Coordination (Income Tax Appeal E182 of 2023) [2025] KEHC 9983 (KLR) (Commercial and Tax) (4 July 2025) (Judgment)

Background:

Bhatt sold her shares in Mayfair CIB Bank Ltd. under a Share Purchase Agreement dated 23rd November 2022. She paid CGT at 5% (Kshs. 2,798,500) on 30th December 2022, believing the tax point (when CGT liability arises) was at the time of the agreement or payment.

Bhatt’s Argument:

She argued that the Finance Act 2022, which increased CGT from 5% to 15% effective 1st January 2023, should not apply to her transaction since it was completed in 2022.

KRA’s Argument :

KRA contended that the tax point for CGT was when regulatory approvals (from the Central Bank of Kenya and National Treasury) were obtained in January 2023, after the rate increase.

The Banking Act required approvals for share transfers in banks, meaning the transaction was only legally completed in 2023, attracting the 15% rate.

High Court’s Decision:

Tax Point Determination: The court agreed with the Tribunal and KRA, holding that the transfer of shares was only effective after regulatory approvals were granted in January 2023. Since the Finance Act 2022 had already increased CGT to 15% by then, the higher rate applied.

Legitimate Expectation Argument Rejected: Bhatt claimed she had a legitimate expectation that paying CGT in December 2022 at 5% would suffice. The court ruled that tax liability is determined by law, not taxpayer expectations, and since the legal transfer occurred in 2023, the new rate applied.

Constitutionality of Paragraph 11A (Income Tax Act): Bhatt had relied on a now-unconstitutional provision (Paragraph 11A, Eighth Schedule, ITA) that required CGT payment before registration of transfer. The court reaffirmed that this provision was struck down in Law Society of Kenya v KRA (2017) and could not be used to determine the tax point.

Final Ruling: The appeal was dismissed, upholding the Tribunal’s decision that the 15% CGT rate applied. However, the Kshs. 2,798,500 already paid at 5% was deducted from the total tax due.

Significance:

This judgment clarifies that CGT liability on share transfers in regulated sectors (like banking) depends on when legal approvals are obtained, not just when payment is made.

34.It is this court’s view that paragraph 2 provides for the time when Capital Gains Tax becomes due which is upon the transfer of property, the meaning of “transfer” is clearly outlined under Paragraph 6 (1) (a) of the Eighth Schedule to the ITA.

35.In this case, the transfer of shares was conditional upon the issuance of the required regulatory approvals. While the Appellant maintains the position that the sale was concluded in 2022 when she paid Capital Gains Tax she does not dispute that the necessary approvals under the Banking Act were granted in 2023. Nor does she contest the clause in the Sale Agreement which provided that the transfer would only be deemed effective upon receipt of those approvals.

36.It is therefore this court’s finding that the legal and beneficial ownership of the shares only passed in 2023 after the regulatory approvals were granted. This position, as advanced by the Respondent, is crucial in determining the applicable tax point. Therefore, since the approvals were granted after 1st January 2023, the Respondent correctly applied the 15% CGT rate under the amended Income Tax Act.

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