Treasury through the 2020 finance bill is seeking to introduce the taxation of Home Ownership Service Plans (HOSPs). The bill proposes to remove the tax relief available to individuals who are saving to own a house under HOSP.
The proposal which was tabled in the National Assembly on Thursday seeks to delete Section 22C of the Income Tax Act which allows a tax deduction on HOSP contributions up to a limit of KES 96,000 per year.
The bill proposes to subject to 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 KES 3,000,000.
An analysis by audit firm KPMG says that this move will reduce the income available for distribution to depositors as interest, negatively impacting their ability to purchase homes.
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.
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 KES 10 million to KES 15 million the upper limit for the residential income subject to the 10% tax rate. The limit was introduced in 2016 for persons with residential income between KES 144,000 and KES 10 million per year.
KPMG said the proposed change will be a welcome relief for landlords who are under pressure to reduce or defer rent payments to help tenants cope with the effects of the COVID-19 pandemic.
The analysts have asked the government to further increase the minimum rental income subject to tax from KES 144,000 is increased to KES 288,000, in order to achieve consistency with the recent adjustments to PAYE bands under the Tax Laws (Amendment) Act.