Some landlords hold property in their own names, and others in a limited company. The tax treatment differs, and the choice has consequences for years, so it is worth understanding before you buy.

An individual landlord

An individual who lets residential property has two options:

  • Monthly rental income tax, a flat 7.5% of gross rent, if gross residential rent is between KES 288,000 and KES 15 million a year; no expenses are deducted.
  • Annual income tax, on the profit after expenses, at the individual rates from 10% to 35%, less personal relief and other reliefs.

An individual can elect, in writing, for the annual route. See monthly rental income tax or annual tax for a comparison, and the rental income tax calculator to test your numbers.

A company that owns property

A limited company is taxed on its profit at the corporation tax rate of 30% for a resident company, after deducting its expenses, interest and capital allowances. The flat tax for residential rent is aimed at individuals, so a company should plan on the corporation tax route and check eligibility with KRA. The corporation tax calculator and the corporation tax computation workbook work out the tax.

What the company changes

  • Profit is taxed at a flat 30%, which can be lower than the top individual rates of 32.5% and 35%, but higher than the lower bands.
  • Taking the money out of the company, as dividends, attracts a further tax; see dividends and paying yourself from a company.
  • Running costs rise: accounts, annual returns, audit where required and director duties.
  • Selling the property may be treated differently from selling shares in the company; seek advice before you decide.
  • Liability for debts is limited to the company, which can be an advantage if the property is mortgaged.

An example

A property earns KES 3,000,000 a year, with KES 1,000,000 of costs and interest. The company's profit is KES 2,000,000 and tax at 30% is KES 600,000. An individual with no other income taxed on the same profit under the annual rates would pay about KES 508,600 after personal relief, so the company is not cheaper here, and dividends add a further tax on whatever you take out. Use the sole trader versus company calculator for a fuller comparison.

When a company makes sense

  • You own several properties and want one structure for them
  • You plan to bring in partners or investors
  • The property is financed with a large loan
  • You want to separate business and family assets

When it may not

For one or two properties let to residential tenants, the added cost and tax can outweigh the benefits. Many small landlords stay individuals and choose the cheaper route each year.

Keep the records

Whichever you choose, keep separate records for each property. See the records every landlord should keep and use the rental property and tenant register.

If you hold property through a company, remember the cost of taking money out. See dividends and paying yourself from a company for the tax on dividends, and compare structures for your own numbers in the corporation tax calculator. If you stay as an individual, deductible expenses for landlords lists what lowers your profit.

This is general information, not advice. Ask a registered tax adviser before you set up a structure.