Motley Fool: Avoid this classic mistake - don’t throw away £25,000

Burberry is an attractive long-term investment for an ISA

Burberry is an attractive long-term investment for an ISA

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Happy Financial New Year!

Don’t worry, I can forgive you for not partying like it’s 1999, unless you’re a fan of paperwork and tax returns…

But here at the Motley Fool, we actually get excited when the new tax year rolls around -- because it marks the first day investors like you and me can get our hands on our new ISA allowance.

Only this year is like no other, following George Osborne’s radical budget overhaul. For the first time ever, we’ll be able to save a whopping £15,000 of our money into tax-free investments over the next 12 months, and the first £11,880 can be invested as early as Monday morning.

If you’re not yet entirely sold on the benefits of using your ISA allowance to invest in shares -- or you’re not completely sure what the new changes mean -- here are the key facts:

• On July 1st, Stocks & Shares ISAs and Cash ISAs will automatically convert into the New ISA (NISA)

• The amount you can invest inside each year is going up to £15,000

• You won’t be taxed on any gains or profits you make inside the NISA

• While the full £15,000 allowance will only become available on July 1st, you can open an ISA with £11,880 on Monday morning and it will automatically form part of your NISA this summer.

• You could be throwing away tens of thousands of pounds if you invest without an ISA.

I bet that last point got your attention!

Are the benefits of investing tax-free really that worthwhile? Perhaps £15,000 sounds too large, or even too small an amount, to make it worth the hassle and effort of opening an account?

Well, allow me to use an example of how you could be throwing away a massive £25,000 by ignoring your ISA. Let’s say you wanted to buy a basic FTSE 100 index tracker, which is like owning a broad cross-section of the UK stock market (no stock-picking magic required).

If you invested £5,000 a year – every year -- for 15 years, and stocks achieved roughly their historical 8% average returns, then you’d most likely be able to sell out for around £115,000 after taxes (we’re being optimistic and assuming you’re a higher-rate tax payer by the time you sell). Not bad!

But let’s say you did the exact same thing, £5,000 a year, only you invested it in an ISA this time. You’d be able to cash out for more than £140,000. That’s a £65,000 gain -- twenty-five grand more in your pocket -- by taking the exact same risk, and putting in the same amount of money!

For those doing the math, that’s an 87% return on your investment.

The only difference between scenario 1 and 2? You guessed it -- in the first example, the tax man got his hands on both your dividends and the capital gains at the end.

Of course, making those kinds of annual returns on your money -- 5% a year capital growth, 3% dividend income -- can be easier said than done. And there are no shortcuts, or methods to “get rich quick”. But here at The Motley Fool, we believe that if you sensibly and consistently invest in strong, profitable businesses -- at prices that make sense -- you can get much more out of your wealth.

To spread your risk and reap the benefits of diversification, we believe you should own a basket of at least 7-10 stocks at any given time. And today, I’ll start you on your way by suggesting one such share that I believe is an attractive long-term investment for your new ISA allowance.

The company is Burberry (BRBY) –a name you’ll probably recognise as a luxury fashion label best known for its eponymous check pattern trench coats.

What you might not know is just how successful this great British brand is proving to be in emerging markets like China -- where consumer power is still in its infancy.

Burberry already generates 40% of its sales in Asia -- partly driven by the 1 million middle-class Chinese households which currently earn more than $75,000 a year. The Economist predicts that in just over 15 years, an incredible 74 million households in China will earn that much -- a 74-fold increase! And a lot of new spending power.

This represents an incredible opportunity for Burberry to sell their high-margin, £1000 coats and bags. And with the shares priced at a modest 16x their earnings this year, I think the shares deserve to be back in fashion with investors. Just imagine what a wonderful business Burberry would be to own outright -- selling high-priced, high-fashion clothing to a growing, affluent base of consumers.

Fashion can be fickle, but Burberry has a long track record of selling its high-end wares that I don’t see slowing down any time soon.

It’s just one example of a superb company you can invest in via the stock market -- just be sure it’s you, and not the taxman, reaping the profits.

But if you already own Burberry, or you’re looking for alternative long-term investment ideas, in this exclusive wealth report I’ve helped pinpoint five particularly attractive possibilities for your new ISA.

All five companies offer a mix of robust prospects, illustrious histories and dependable dividends, and have just been declared by the Motley Fool as “5 Shares You Can Retire On”!

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