The Impact of New Capital Gains Tax on Asset Allocation of Investment Groups in Nairobi

Abstract

Asset allocation decision remains the central element of portfolio construction in the investment industry today. However, one of the key issues facing an individual is how to allocate wealth among alternative assets mostly in the presence of capital gains tax. Many assets face both profits from capital gains and dividends, which are taxed at different rates. Thus, this study examined the impact of new capital gains tax on asset allocation of investment groups in Nairobi County, Kenya. The study used a descriptive research design and a sample of 32 investment groups in Nairobi County were selected for the study using stratified and simple random sampling methods. Data for the study was collected using questionnaires which were administered to the sampled group leaders from each investment group. The data collected was analyzed using descriptive and inferential statistics with the help of the Statistical Package for Social Studies. To test hypothesis the classical linear regression was used. The study findings established that capital gain tax compliance costs had a positive and statistically insignificant relationship with asset allocation decisions while capital gains tax liability had a negative and statistically significant relationship with asset allocation decisions by investment groups in Nairobi County. The study also established that capital gains tax knowledge had a positive and statistically significant relationship with asset allocation decisions and by investment groups in Nairobi County. The study concluded that there is an inverse relationship between the amount of capital gain tax payable and asset allocation decisions by investment groups since an increase in CGT liability would reduce the expected returns from the investments which may discourage investors from selling their asset and instead prefer holding them. The study recommended that the Kenya Revenue Authority and the government at large should initiate training programs on capital gains taxation to enlighten investors on the different investment which qualify for capital gain tax.