The recent decline in the prices of a wide range of UK shares may dissuade some investors from buying them in a Stocks and Shares ISA. After all, the prospects for many sectors continue to be very uncertain, and could worsen before they improve.
At the same time, the stamp duty holiday may entice some investors to purchase buy-to-let properties. They may be drawn by the solid track record of growth offered by house prices, as well as high demand for rental properties.
However, UK shares could offer lower risks and higher long-term returns than buy-to-let properties that make them a better means through which to build a retirement nest egg.
Lower risks of UK shares
One of the key differences between buying UK shares and buy-to-let property is their accessibility. While it is possible for almost any investor to build a diverse Stocks and Shares ISA, the same cannot be said for buy-to-let property.
For example, the purchase price of one property means that an investor requires a substantial deposit. They are then exposed to risks such as extended void periods, high repair costs and the failure of a tenant to pay rent. Since they may be reliant on one or a small number of properties, any of these risks coming to fruition could cause their returns to decline significantly.
By contrast, owning a diverse range of UK shares is possible due to the low cost of managing and operating a Stocks and Shares ISA. And, for those investors who have limited capital, the availability of tracker funds that closely match the returns of indexes such as the FTSE 100 and FTSE 250 could lead to lower risks.
Higher returns of UK shares
UK shares also offer higher return potential than buy-to-let property. One of the key reasons for this is their differing tax situations. Whereas buy-to-let investors must pay stamp duty on second home purchases, as well as income tax and capital gains on their profits, ISA investors avoid all such taxes. As such, the net returns on stocks may be significantly higher than those of buy-to-let property.
Furthermore, the stock market has a strong track record of recovery from its various downturns. Certainly, during periods of decline such as the 1987 crash and the financial crisis, a return to previous highs seemed unlikely. But, over time, the stock market has always posted new record highs. It could do likewise this time around, with monetary policy and fiscal stimulus having the potential to return UK shares to growth.
Long-term potential
Now could be the right time to build a diverse Stocks and Shares ISA containing UK shares. They appear to offer greater return prospects and lower risks than buy-to-let property, which could improve your capacity to retire with a generous nest egg to enjoy financial freedom in older age.
