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Why buy-to-let property could be the biggest investing misstep you can make in 2020

The writing is on the wall for buy-to-let, although the truth is, it’s been there ever since former Chancellor George Osborne unveiled his tax crackdown in 2015.

Tax attack

That’s when he announced that landlords would face cuts in the tax relief they can claim on mortgage interest payments, to a maximum of just 20%. The cut, introduced over four years from April 2017, was designed to create a “level playing field” between homeowners and investors, and it has certainly levelled the buy-to-let market.

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Growing numbers of private landlords are exiting the market because they struggle to make ends meet, and we can expect a further exodus this year. A quarter of landlords plan to sell at least one of their properties in 2020, new research from Simply Business shows, blaming uncertain market conditions, government reforms, and tax increases. An astonishing half a million homes could be put up for sale.

Stamping down

Landlords also face a 3% stamp duty surcharge on purchases, which bumps up the levy on a £300,000 property from £5,000 to £14,000. No wonder 82% of landlords are not planning on buying any properties in 2020, according to Simply Business. Just 13% said they would buy this year.

Along with tax increases, the other main reason landlords are selling include increased government red tape, such as House in Multiple Occupation (HMO) licensing, which added new stipulations on the minimum size of rooms and banned administration fees.

Other issues include rising rental costs, economic instability, and slowing house prices. This means income from rental isn’t just under pressure, capital growth is too.

This confirms my opinion that the life is being squeezed out of the once hugely attractive buy-to-let sector. Remember, the Treasury has even reduced ‘wear and tear’ allowances for landlords. When the government effectively goes to war on an investment, resistance is futile.

Shares are so much easier

Amateur landlords also have all the effort of doing up and maintaining a property, finding and replacing tenants, appointing and paying a managing agent, and sorting out the income tax and capital gains tax. House prices are also expensive, and continue to slow. Despite December’s pick-up, prices rose just 1% last year, according to Halifax.

By comparison, the US S&P 500 index rose 27%, the global MSCI index jumped 25%, and the FTSE 100 grew more than 10%.

The other big advantage is that if you invest inside a Stocks and Shares ISA, you do not have to pay any income tax or capital gains tax on your returns, for life. Also, there are no leaking roofs to fix, lazy letting agents to chase, deposits to collect, or tenants to chivvy into paying their rent.

You can build a portfolio of top FTSE 100 stocks in just a few minutes, then sit back and leave your capital to grow and your dividend income to roll up, making you steadily richer. Here are three FTSE 100 stocks you could buy for an ISA today.

Of course, share prices can be volatile, and do not rise every year, but in the longer run the general trajectory is upwards. And whatever happens, it will be a lot less bother than a buy-to-let.

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Harvey Jones has no position in any of the shares 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.