How to give £50,000 to Radley and save yourself £24,000

Mr Green has an income of £50,000 in the 2002/2003 tax year. He owns units in a unit trust which he bought for £5,000 in June 1994, and which are now worth £50,000. This means that he has a capital appreciation of £45,000 on these shares. He decides to make a gift of these to Radley's Scholarship Fund in June 2002 which means that he will make a saving on his income tax bill of £12,541. In addition, he will avoid capital gains tax of £12,009.

Income Tax Saving
No gift
£
Gift of
£50,000
£
Total Income
50,000
50,000
2002/2003 Personal allowance (single person)
(4,615)
(4,615)
Taxable income before gift
45,385
45,385
Less: Value of gift of shares
(50,000)
Taxable income
45,385
0
Income tax liability (2002/2003 tax bands)
At 10% on £1,920
192
0
At 22% on £1,921 to £29,900
6,155
0
At 40% on > £29,901
6,194
0
Income tax payable
12,541
0

As a result of the gift, Mr Green's tax bill for 2002/2003 is reduced to zero, a saving of £12,541. However, if he spreads his gift over several years he could make a greater total tax saving. He will not get a larger amount in one year because it is not possible to offset the gift against income tax that is not due, i.e. you cannot have a negative tax bill.
Capital Gains Tax Saving
Sold or
given to a
non-charity
£
Gift of
£50,000
to charity
£
Disposal proceeds
50,000
50,000
Less: cost of £5,000
(5,000)
(5,000)
Un-indexed gain
45,000
45,000
Less: annual exempt amount (2002/2003 allowance)
(7,700)
(7,700)
Less: indexation allowance
(620)
(620)
Less: taper relief
(6,657)
(6,657)
Gain after allowances
30,023
30,023
Less: exempt amount
0
(30,023)
Chargeable gain
30,023
0
Tax bill at 40%
12,009
0

Capital gains tax potentially arises when an individual disposes of an asset, either by selling it or giving it away, unless it is a charitable gift. All capital gains for that year are aggregated and, if greater than that year's allowance, are taxed at the individual's marginal tax rate.

Please note that this assumes that the investor is external and owns less than 5% of the company, and therefore the shares are treated as a non-business asset.