The multi-million pound gesture will be his way of saying thank you to the young people who helped him amass his wealth.
The building will become a performing arts space for rock concerts, theatre, circus and multi-media events. And below ground level there will be a creative centre for young people.
Torquil Norman, who is donating more than pounds 6m from his family trust, said he wanted to give something back to young people. He had used children's ideas in focus groups when he made toys, he said, and he was appalled at the lack of opportunities for young people today.
The Roundhouse, a former railway shed, was in the Sixties and Seventies at the centre of London's youth culture. It was a scene of radical theatre and rock performances, most notably by The Rolling Stones, The Doors, David Bowie and The Who. But in recent years it has been standing empty, until Mr Norman bought it. Performances have been staged there in recent months but in 2000 it will close for two years for a pounds 24m redevelopment.
The new Roundhouse will open up the Undercroft below street level for a creative centre for young people, where they can explore fashion design, film and video making, broadcasting and multi-media technology. The London School of Fashion and other organisations have already pledged their involvement.
The new building will host have a new tower structure at the front, a gigantic "lid' under the roof for jazz and other music performances in a 400-seater area, and the main space, which will hold an audience of 2,400, will be used for rock concerts and other performing arts. There will also be a restaurant and cafeteria.
Torquil Norman founded Bluebird Toys, makers of the Polly Pocket toys, in 1980 and by the time he retired two years ago as executive chairman had made nearly pounds 100m. When he retired he immediately bought the Roundhouse. He has also founded The Norman Trust, a charity for young people, and will receive no money personally from the Roundhouse's activities.
Mr Norman said yesterday: "I really got to feel that young people get a raw deal these days. Young people who are not academically bright either get into a serious muddle or land up in jobs that they hate, and there's nothing worse than that."