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Why I’d dump buy-to-let and dive into an ISA today

Over the past few decades, investing in buy-to-let has been a sure-fire way to generate fantastic returns on your money. The combination of lucrative tax breaks, the ability to borrow to increase returns and a rising property market, have all helped buy-to-let investors grow their wealth.

However, the environment is now changing rapidly. The government is clamping down on the lucrative tax breaks that used to be available to landlords, and policymakers are also introducing regulation that hands more power to tenants, which could increase maintenance costs and lower overall returns.

Cooling market 

These measures are all designed to cool the buy-to-let property market, and it looks as if they’re working. According to data from UK Finance, £9bn of new buy-to-let mortgages were issued in 2018, a 15% decline on 2007, even though the number of buy-to-let mortgage products on the market recently hit an all-time high. 

Cooling demand for investment property already seems to be having an impact on property prices. On one measure, home prices only increased 2.5% across the UK last year and analysts are expecting a similar meagre increase in 2019.

As capital growth has historically made up a significant portion of the returns from buy-to-let, slowing price growth implies property investors are going to see much lower returns going forward (that’s without taking into account the impact of the tax changes the sector is facing).

Time to buy the FTSE 100

After taking all of the above into account, I would dump buy-to-let and jump into a Stocks and Shares ISA today. There are many advantages to putting your money here over property investing. For a start, any money invested in an ISA doesn’t attract any tax on income or capital gains. You don’t even need to declare any money you hold in an ISA on your tax return. It doesn’t matter how much money or income your ISA is producing, it’s always tax-free. 

On the other hand, income from property is taxed at your marginal rate which, for higher taxpayers, could be 45%.

As well as the tax benefits, ISAs give you the ability to invest your money around the world at a click of a button. One of the big problems with buy-to-let property is that it’s tough to build a diversified portfolio unless you have several million pounds to invest.

The same isn’t true for equity investing. All you need to do is buy a FTSE 100 tracker fund and you’ll have an instant portfolio of 100 of the world’s largest companies spanning everything from oil production to insurance.

Another benefit is the fact that you don’t have to do anything to receive dividend income from the companies you own. Unlike property, which requires regular maintenance (and recent government regulation has only increased the maintenance burden on landlords) all you need to do with shares is sit back and collect your regular dividend cheque.

So, that’s why I would dump buy-to-let and dive into an ISA today. ISAs are more flexible, have attractive tax benefits, and don’t require as much effort on your part. What’s not to like?

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Rupert Hargreaves owns no share mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.