How to give £100,000 to Radley and save yourself £63,000

Mr Brown has an income of £500,000 in the 2002/2003 tax year. He owns shares in Company X which he bought for £20,000 in June 1996, and which are now worth £100,000. This means that there is a capital appreciation of £80,000 on these shares. He decides in August 2002 to make a gift of these to the Foundation for the new theatre. This will result in a saving on his income tax bill of £40,000. In addition he will avoid capital gains tax of £23,692.

Income Tax Saving No gift
£		 Gift of
£100,000
£
Total Income
500,000
500,000
2002/2003 Personal allowance (single person)
(4,615)
(4,615)
Taxable income before gift
495,385
495,385
Less: Value of gift of shares
(100,000)
Taxable income
495,385
395,385
Income tax liability (2002/2003 tax bands)
At 10% on £1,920
192
192
At 22% on £1,921 to £29,900
6,155
6,155
At 40% on > £29,901
186,194
146,194
Income tax payable
192,541
152,541

This is a direct tax saving of £40,000 on his income tax bill and will be a benefit received following the filing of his tax returns.
Capital Gains Tax Saving
Sold or
given to a
non-charity
£
Gift of
£100,000
to charity
£
Disposal proceeds
100,000
100,000
Less: cost of £20,000
(20,000)
(20,000)
Capital gain
80,000
80,000
Less: annual exempt amount (2002/2003 allowance)
(7,700)
(7,700)
Less: indexation allowance
(1,260)
(1,260)
Less: taper relief
(11,811)
(11,811)
Gain after allowances
59,229
59,229
Less: exempt amount
0
(59,229)
Final chargeable gain
52,229
0
Tax bill at 40%
23,692
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.