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Tax incentives at the centre of affordable housing ambitions


Tax incentives at the centre of affordable housing ambitions

Monday July 03 2023

The Ongoing construction of Affordable Housing at Buxton in this photo taken on October 12, 2022. PHOTO | KEVIN ODIT | NMG

The Kenyan Constitution recognises the right to housing under the Bill of Rights. It provides that every person has the right to accessible and adequate housing and to reasonable standards of sanitation.

Vision 2030, launched in 2008, identifies housing and urbanisation as critical elements in the realisation of its objectives. It aims to have an adequately and decently housed nation in a sustainable environment noting that with the current demographic trends, Kenya is set to be a predominantly urban country.

Medium Term Plan (MTP) 1, which ran from 2008 to 2012, targeted the construction of 200,000 housing units annually.

This was mainly through the construction of low-cost housing units through PPP arrangements and the set-up of a secondary mortgage finance corporation to encourage individuals to construct houses.

Notably, MTP 2 which ran from 2013 to 2017, and most recently MTP from 2018 to 2022 set housing as a key agenda item with the previous government targeting to deliver 500,000 low-cost affordable housing units.

This was to be achieved through budgetary allocations and partnerships with financial institutions, private developers, cooperatives, and manufacturers of building materials.

Additionally, a National Housing Development Fund was also to be established and other financing strategies created to finance low-cost housing and associated social and physical infrastructure.

Taxes are a key policy tool in the achievement of most government initiatives. Targeted and effective tax policies can no doubt achieve significant positive economic outcomes.

The government has provided an array of tax incentives to individuals and developers to encourage home ownership.

First, a lump sum paid out of a registered home ownership savings plan that is used for the purchase of an interest in or for the construction of a permanent house for occupation by the depositor within twelve months immediately following the year of withdrawal is exempt from income tax.

The law also provides an affordable housing relief to resident individuals where in a year of income the persons is eligible to make an application under an affordable housing scheme and is saving for a purchase under an affordable housing scheme.

Additionally, the amount withdrawn from the National Housing Development Fund to purchase a house by a contributor who is a first-time homeowner is exempt from income tax.

For home purchasers, they are entitled to mortgage interest deduction not exceeding three hundred thousand shillings in respect of a year of income upon money borrowed by him from either a licensed bank, insurance company, building society, National Housing Corporation or a co-operative society and applied to the purchase or improvement of premises occupied by him during that year of income for residential purposes.

For developers, in the case of a company that has constructed at least 100 residential units annually they are entitled to a reduced corporate income tax rate of 15 percent for that year of income, subject to approval by Cabinet Secretary responsible for housing.

By and large, the Government has been deliberate in using tax incentives to encourage home ownership. The ongoing national debate on affordable home ownership is healthy and hopefully will enable the country to achieve the elusive goal.

Robert Maina is an Associate Director at Ernst & Young LLP (EY). The views expressed herein are not necessarily those of EY.