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Why I’d dump buy-to-let and open a stocks and shares ISA today

For many investors, choosing between a buy-to-let and a stocks and shares ISA has been difficult in previous years. The UK’s lack of property compared to rising levels of demand has caused the appeal of becoming a landlord to increase. Similarly, the asset’s tax-efficient status and buoyant demand for rental properties among tenants has meant that it has been highly appealing.

Now, though, changes to the tax status of both a buy-to-let and a stocks and shares ISA could mean that the latter has greater appeal. With the FTSE 100 appearing to offer good value for money and reduced risks versus buy-to-let, investing in shares through an ISA could prove to be a sound move.

Tax changes

With mortgage interest payments now unable to be offset against income for some landlords, the tax-efficient status of buy-to-let has come under pressure. Other changes such as an additional 3% in stamp duty on second homes mean that the net return from property investing could become increasingly limited.

Even though there have been changes to dividend tax and capital gains tax in recent years, investments made through an ISA are exempt from such taxes. With an allowance of £20,000 per year, investors could develop a large and highly tax-efficient ISA portfolio in the long run.

Return potential

While there will likely still be a lack of properties available versus rising demand, affordability is becoming an increasing concern for property investors. The government’s Help to Buy scheme is unlikely to remain in place in the long run. If it expires, it could mean that higher deposits are required among first-time buyers. This may lead to reduced demand and a natural decline in prices – especially if interest rate rises make obtaining a mortgage more challenging.

By contrast, the FTSE 100 remains significantly below its all-time high. This suggests that it could offer good value for money, and may be able to generate impressive return potential in the long run.

Risks

With the outlook for the UK economy being uncertain at the present time, rental growth may be less impressive than it has been in the past. Demand for rental properties at their current price points could come under pressure, which could increase the risk of void periods and tenant arrears. With many landlords having concentrated portfolios, this could lead to a difficult outlook for them.

But diversifying among shares through an ISA has never been easier. Tracker funds, a variety of shares operating across the world, and a number of different sectors, can all be added to an ISA. The cost of doing so is relatively low, with it being possible to diversify away company-specific risk at a relatively cheap price.

As such, with improving tax advantages, higher return potential and the prospect of lower risks, a stocks and shares ISA could offer greater investment appeal than a buy-to-let at the present time.

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