Time is running out on tax-free Isa allowance

DO NOT leave it too late if you want to use this year’s tax-free Isa allowance, as the deadline is just over a month away at midnight on April 5.

If you do not use this year’s £20,000 allowance before then, you will have lost it for good.

However, the urgency is lower than before as you get a new £20,000 allowance from April 6, which is far more than most people can afford to invest these days.

Isas are attractive because they allow you to pay money into cash or stocks and shares, and take all your returns free of income tax and capital gains tax for life.

You can even pass these benefits on to your spouse on death, although thereafter it will become subject to inheritance tax.

Isas were originally launched by former Chancellor Gordon Brown in April 1999, and were worth an incredible £620 billion by the end of the 2019/20 tax year.

Roughly half this money was held in cash Isas, with the remainder in stocks and shares Isas, which are riskier but offer far superior returns over the longer run.

The UK now has more than 2,000 “Isa millionaires”, almost all of whom will have invested in the stock market, rather than cash, HMRC figures show.

They hold on average £1,412,000 each, money that is sheltered from the taxman’s clutches while they are alive, said Wealth Club chief executive Alex Davies.

“However, heirs to these estates may not feel quite so smug as they face a massive potential inheritance tax bill on that money, running to hundreds of thousands of pounds,” he said.

Somebody who has invested their full allowance since 1999 and earned a steady 5 per cent a year would have a pot of just over £441,000 today, said AJ Bell head of personal finance Laura Suter. “They will need to have generated an average return of 25 per cent a year to achieve Isa millionaire status,” she added.

Some will have done this by making a few successful bets, for example, investing in a top growth stock like Amazon at an early stage. Others will have invested in some top funds, including Scottish Mortgage Investment Trust, the best performer over 20 years.

If you had maxed out your annual Isa allowance into that fund, you would have £1.8 million today, with Allianz Technology Trust close behind, while private equity fund HgCapital Trust and Polar Capital Technology would have given you £1.6 million.

Baillie Gifford American would have increased your contributions to £1.4 million, with Liontrust UK Smaller Companies, Baillie Gifford Pacific and Janus Henderson Global Tech Leaders delivering more than £1.25 million.

Becoming an Isa millionaire should become easier in future, due to the increased £20,000 limit, up from £7,000 in 1999, Suter added.