On Wednesday, November 17, 2021, journalist Gabriel Buule penned a piece in Daily Monitor about why rental rates for houses in Kampala are rising, citing the opinions of various brokers.
In the piece, Buule claims that the trend has been fuelled by new taxes created by the government, and an influx of foreign nationals in Kampala, among others.
However, Buule only tells half of the story, leaving out important facts. Let’s start with his claim “new taxes created by the government are driving up rental rates”.
In Kampala, property tax (property rates) is levied by KCCA. This is a 6% tax on the value of your commercial building or structure. This is not a new tax, it has been in place since 2005.
KCCA performs property valuations every 5 years (or more), and the last valuation exercise was undertaken in 2017. Therefore, KCCA is levying a 6% tax on the value of properties that was determined 5 years ago; a rate which is now grossly undervalued compared to actual property values in today’s market.
Ground Rent, on the other hand, is not a tax. Ground rent is the annual cost of leasing land from the KCCA.
Then Buule cites rental income tax, levied by Uganda Revenue Authority. Rental income tax is a tax on the money a landlord earns from the lease or rent of land and buildings.
However, Buule fails to mention that landlords can claim up to 75% in deductions against the rent they collect and that both property tax and ground rent are allowable deductions that reduce one’s rental tax liability.
To quote Buule; “This means that if the annual rental of a residential house owner is Shs100 million, 30 percent of the money is paid to URA after deducting expenses”.
While the statement is technically true, it doesn’t explain the full story. Let’s break down how much tax a landlord is actually liable for paying, using Buule’s own example:
A landlord earns a rental income of USh 100,000,000
The landlord is allowed to claim expenses (property rates, ground rent, losses due to COVID-19, etc.) of up to 75% of rental income for the year.
Rental expenses are calculated as follows:
Chargeable Income = total rental income – total allowable expenses
Therefore, Chargeable Income = 100,000,000 – (75%*100,000,000)
Therefore, Chargeable Income = 100,000,000 – 75,000,000
Therefore, Chargeable Income = 25,000,000
Rental Tax = 30% of Chargeable Income
Therefore, Rental Tax = 30% of 25,000,000
Therefore, Rental Tax = 7,500,000
By Buule’s own example, a landlord who is earning a rental income of USh 100,000,000 is only liable to pay USh 7,500,000 in rental income tax after deductions. By comparison, an individual earning the same wage would have 30,000,000 deducted from their salary in PAYE income tax.
Buule claims that rental rates in Kampala have increased by as much as 50 percent in some areas. How can “new taxes created by the government” be the cause, when in reality the rental income tax has an effective tax rate of only 7.5 percent after deductions are factored in?
Rental income tax is not a new tax either. Although, the government did make changes to legislation surrounding rental income tax that came into effect this year. These changes were also widely misrepresented in the media, so let’s break them down also:
As of July 1, 2021, the rate of rental income tax for individual landlords changed from 20% to 30%, however, at the same time the cap on allowable expenses was raised from 20% to 75%. What does this mean exactly? The effective tax rate, after factoring in deductions, decreased from 16% last year, to only 7.5% this year.
In effect, the government has given individual landlords an effective tax reduction of 8.5% compared to the previous year. Therefore, to claim “new taxes created by the government” as the cause of the rise of residential rental prices is simply not true.
Next, let’s take a look at Buule’s claim that an influx of foreign nationals in Kampala is driving up residential rent prices, under his subheading of ‘Refugee Influx’.
According to Knight Frank’s H2 2020 Kampala Market Performance Report, many foreign nationals, who do indeed form a large part of the tenant market, repatriated to their home countries at the announcement of the lockdown in March 2020, resulting in decreased occupancy and rent levels.
The expatriates leaving Uganda amid fears of being locked out of their native countries caused a drop in average occupancy of prime residential apartments by 8% year-on-year in the second half of the year 2020, as compared to the second half of the year 2019.
Knight Frank further acknowledges that the first six months of 2021 have seen the return of numerous expatriate employees that had left Uganda shortly before the beginning of the first lockdown period.
Therefore, the increase in rental rates in Kampala is likely to be merely a recovery of the residential market and a return to the status quo.
It is further noted by Knight Frank’s data, that these foreign nationals tend to occupy high-end commercial residential apartments and units, which are not the same affordable residential housing units in highest demand among native Ugandans within Kampala. Therefore, to imply that the foreign nationals are out-competing the natives for rent resources is not exactly true.
One should also point out that migrants are not considered refugees, and shouldn’t be labeled as such.
The distinction between migrants and refugees is an important one. Migrants can choose to move back and forth, whereas refugees, who are in danger of conflict or persecution, do not have the luxury of choice. Refugees are therefore are entitled to certain rights, such as protection from being deported or returned to situations that might threaten their lives, whereas migrants have no such rights.
Choices about words do matter.
This article was contributed by Faith Sanyu.
Faith Sanyu is a journalist specializing in real estate news.