Such is my affection for tax-free saving that when our first granddaughter was born last year, I suggested she be named Isa.
Given that her brother is called Isaac, and as a family we have handsomely benefited from the creation of the tax-free stocks and shares investment accounts, I judged Isa to be an excellent suggestion. However, I have to report that grandfather’s idea was not well-received or even appreciated — a big raspberry for me. Thankfully, and more importantly, Florence is a wonderful addition to the family.
More seriously, my relationship with Isas (individual savings accounts) and their precursors Peps (personal equity plans) now goes back 32 years. I was the MP for Pendle in Lancashire when Peps were created by Nigel Lawson, then chancellor of the exchequer, in 1987.
I immediately realised the golden potential of being able to build up a share portfolio annually where dividends were free of income tax, and growth was free of capital gains tax.
However, my biggest initial problem was finding a plan manager — the precursor to today’s online investment platforms — that would allow me to select my own stocks, as I always insist on. In those early days, there were few plan managers and they usually only allowed investors to select from their list of approved stocks.
Finally, after much searching, I discovered Midland Bank Executor and Trustee and set up my Pep with them. The amount that one could invest has varied over the years, and was also overcomplicated for a time by a “general” Pep and a ‘“single” Pep, but for 17 years I stuck by this simple rule: I invested the maximum annual allowance, and I reinvested all dividends. In spite of all the administrative changes, this simple rule still stands.
Twenty years ago, the Labour government replaced Peps with Isas, but to all intents and purposes they were the same.
As I have detailed in my book, How to Make a Million — Slowly, my investment approach is firmly rooted in an appreciation of small-cap companies.
Back in 1987, having opened my Pep, I invested the whole £2,400 annual allowance in Pifco, a Manchester-based electrical manufacturer and wholesaler which ticked all the boxes I still look for today. It was a small, well-established and conservatively managed business, profitable with a strong family shareholding. It produced recognised brands, and had a strong cash position with growing dividends. It remained my Pep selection for a number of years — finally, and very profitably for me, being taken over 14 years later by Salton of the US.
By 2003, my Isa portfolio had risen in value to just over £1m. The media rather embarrassingly dubbed me “The First Isa Millionaire” — whether I was or wasn’t, nobody rose to challenge.
To get to my million pound valuation, I had invested £126,200 of capital into Peps and Isas, plus reinvested all the dividends. Importantly, the tax-free status of the Isa meant that theoretically, I could withdraw the whole lot and not pay a penny in income tax, dividend tax or capital gains tax.
However, I continued to invest the maximum Isa allowance for another few years, but then stopped for a long period as I did not have the free cash to invest. Given the further significant growth of my Isa portfolio, the need to use the annual investment allowance became less relevant.
Today, the dividend income that I’m able to reinvest within the Isa each year is around 100 per cent of the value of capital originally invested.
Today, investing in stocks and shares Isas is well established, but I feel that many investors missed the boat in those early years. I think the wealthy judged the amounts one could invest irrelevantly small, while those with more limited funds understandably could not afford year-on-year investment.
Over my 60-year investment life, I have been on the receiving end of approximately 50 takeovers — thankfully quite a number tax-free within my Isa — including Bridport, Breedon, and Trafford Park Estates. The proceeds have obviously helped to build up overall value.
My final suggestion for Isa investors is that you should try, if possible, to pay your annual management charges from non-Isa funds, thus preserving every last penny of your valuable tax-free pot.
Today, Isas must be the best tax wrapper in the western world. Up to £20,000 each for both partners to invest — free of income tax, capital gains tax, inheritance tax relief on approved Aim stocks held for two years and the ability to transfer benefits between spouses or civil partners upon death. So buy now while stocks last.
John Lee is an active private investor and author of ‘How to Make a Million — Slowly’. He is a shareholder in all the companies indicated.
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