The FTSE 100 has defied this year’s global stock market crash and offers better value than investing in a buy-to-let property.
Buy-to-let took off in the mid-1990s and generated huge returns for amateur landlords for 25 years. They enjoyed capital growth from rocketing property prices, plus rising income from renting to tenants.
But while money can still be made there, buy-to-let has been taxed and regulated heavily. I now think that FTSE 100 shares will give me a better long-term return, with much less effort. They also enjoy huge tax advantages, if I buy them inside my Stocks and Shares ISA allowance.
The FTSE 100 is a world-beater this year
Stock markets have had a tough year, especially in the US, with the S&P 500 falling 20.99% in dollar terms. There have been no bear market blues for the FTSE 100, though. It has fallen just 4.56% year-to-date.
While investors have dumped overvalued US tech giants, I can buy London-listed blue-chips at bargain valuations. The index now trades at just 11.4 times earnings. That is way below its three-year price/earnings ratio of 25.7.
The FTSE 100 looks far better value than the UK housing market, which has raced out of sight. The average property now costs a staggering 9.1 times average salary. That compares to just 3.55 times 25 years ago in 1997.
Now looks like a good time to buy shares. While markets have been volatile, I will hold them for a minimum of 20 years and ideally longer. That gives them plenty of time to grow in value, and overcome short-term setbacks.
Chancellor Kwasi Kwarteng is expected to cut stamp duty on property purchases in his emergency mini-budget on Friday. This may give house prices another boost, and make it cheaper for landlords to purchase a new buy-to-let.
I prefer the tax advantages of shares
Yet with the Bank of England hiking interest rates aggressively, mortgages are getting more expensive, which will eat into margins. Many buy-to-let deals charge 5% or 6% and have upfront product fees of up to £2,000.
Perhaps the biggest drawback with buy-to-let is that it is taxed heavily. Rental income is subject to income tax, while price growth attracts capital gains tax. Also, landlords can no longer claim higher rate tax relief on their mortgage payments.
By contrast, if I buy shares inside a Stocks and Shares ISA, there is zero tax to pay. I do not even have to mention them on my self-assessment return. Plus I can buy and sell shares in seconds, while selling property takes months. Also, I do not have the worry of finding and replacing tenants, or upgrading and maintaining the property.
Buy-to-let does hold some attractions. Property shortages mean tenant demand is strong. Rents should steadily rise, giving me inflation protection, too. Yet buy-to-let is hard work if done properly, and I do not want that level of responsibility.
Once I have chosen my FTSE 100 shares, I can let them get on with the job of generating tax-free income and growth. Today they look dirt-cheap, so why wouldn’t I buy them?
Please note that tax treatment depends on the individual circumstances of each client and may be subject to change in future. The content in this article is provided for information purposes only. It is not intended to be, neither does it constitute, any form of tax advice. Readers are responsible for carrying out their own due diligence and for obtaining professional advice before making any investment decisions.
