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

A stocks and shares ISA could offer higher returns, lower risks and more favourable tax advantages than buy-to-let in my opinion.

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

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.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

More on Investing Articles

Person holding magnifying glass over important document, reading the small print
Investing Articles

The market is wrong about this FTSE 250 stock. I’m buying it in April

Stephen Wright thinks investors should look past a 49% decline in earnings per share and consider investing in a FTSE…

Read more »

Black father and two young daughters dancing at home
Investing Articles

1 FTSE 250 stock I own, and 1 I’d love to buy

Our writer explains why she’s eyeing up this FTSE 250 growth phenomenon, and may buy more shares in this property…

Read more »

View of Tower Bridge in Autumn
Investing Articles

The FTSE 100 is closing in on 8,000 points! Here’s what I’m buying before it’s too late!

As the FTSE 100 keeps gaining momentum, this Fool is on the lookout for bargains. Here's one stock he'd willingly…

Read more »

Investing Articles

3 ideas to help investors aim for a million-pound Stocks & Shares ISA

The UK has a growing number of Stocks and Shares ISA millionaires, and this plan may be one of the…

Read more »

Illustration of flames over a black background
Investing Articles

2 red-hot UK growth stocks to consider buying in April

These two growth stocks are performing well, but can they continue to deliver for investors through 2024 and beyond?

Read more »

Charticle

Is JD Sports Fashion one of the FTSE 100’s best value stocks? Here’s what the charts say!

The JD Sports Fashion share price remains a wild ride during the first quarter. Could it be one of the…

Read more »

Investing Articles

Could the JD Sports Fashion share price double in the next five years?

The JD Sports Fashion share price has nearly halved in the past five years. Our writer thinks a proven business…

Read more »

Bus waiting in front of the London Stock Exchange on a sunny day.
Investing Articles

If interest rate cuts are coming, I think these UK growth stocks could soar!

Falling interest could be great news for UK growth stocks, especially those that have been under the cosh recently. Paul…

Read more »