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Buy-to-let could damage your wealth in 2020. Here’s where I’d invest instead

The UK property market is in decent shape, despite recent political and economic uncertainty. People still want homes, and chronic supply shortages mean there is plenty of competition for them.

Bye-bye buy-to-let

Despite that, I still wouldn’t invest in a buy-t0-let property in 2020, because I don’t think the sums add up for most private investors.

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The raft of tax hikes have made it much harder for ordinary people to earn a decent profit from investing in property. First, you face a 3% stamp duty surcharge on the purchase, so instead of paying £5,000 upfront on a £300,000 home, you will pay a thumping £14,000.

Second, wear and tear allowances have been reduced, so instead of claiming a flat 10% of rental income, you can only claim what you can show an invoice for.

Thirdly, higher rate tax relief on mortgage interest is being phased out, and will disappear altogether from April 2021. This is hitting 40% and 45% taxpayers hard, in some cases wiping out their profits.

Former Chancellor George Osborne, who announced the crackdown in 2015, claimed to be levelling the playing field for first-time buyers. It is not a coincidence that his moves have also boosted Treasury coffers.

As a result, I believe buy-to-let no longer works for private investors just wanting to own a property or two, to give them a passive income in retirement. It may work better for professional landlords, who can buy via a limited private company, with a less punitive tax treatment.

I would buy shares instead

Personally, I would keep things simple, and invest for retirement inside a Stocks and Shares ISA, for 2020 and beyond.

This is so much easier than buying a property, because you have none of the upfront charges, such as stamp duty, mortgage arrangement fees, conveyancing and survey costs, doing up the property and searching for tenants.

Investing in equities is a lot quicker too. You can sign up to a low-cost online platform, and start buying and selling stocks in minutes. There are no upfront charges, dealing fees have tumbled in recent years, and by using your £20k ISA allowance, you can take all your capital growth and dividend income free of tax.

The Treasury may have its sticky fingers all over the returns you make on a buy-to-let property, but it cannot touch your ISA profits, for life.

In fact, you do not even have to set them out on your tax return.

Keep it simple

An easy option for your ISA would be to invest in a straightforward exchange traded fund (ETF) tracking the fortunes of the UK’s FTSE 100 or FTSE 250 indices, offered by ETF providers such as iShares or Vanguard. Unlike buy-to-let, you can also invest easily overseas, say, by tracking the US S&P 500 index.

As your confidence grows, you can turbocharge your growth and income by assembling your own portfolio of individual stocks and shares. That’s another good reason to choose shares over property in 2020.

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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.