Buy-to-let property and UK shares have been two very profitable assets for investors over recent decades. House prices have produced large returns despite experiencing challenging periods. Similarly, FTSE 100 shares have delivered high single-digit returns to catalyse investor portfolios.
However, buying stocks in 2021 could prove to be a better idea than investing in buy-to-let property. Their lower valuations, the capacity to diversify in an uncertain economic environment, and tax advantages could make them a more logical move compared to buying properties.
The low valuations of UK shares
While property prices have soared to record highs across much of the UK in recent months, many UK shares continue to trade at low prices. Sectors that face challenging short-term outlooks, such as the energy and travel industries, contain a number of companies that are trading at very low prices.
Where those businesses have the financial means to survive further disruption caused by the coronavirus pandemic, they could offer long-term capital growth potential.
By contrast, high UK house prices may fail to continue rising at a fast pace. After all, affordability concerns could hold back their growth trajectory, as first-time buyers struggle to get onto the property ladder.
Furthermore, factors such as rising unemployment and weak wage growth could mean many people postpone a house move or delay buying their first property. This may mean house price growth is subdued compared to its performance over the last year.
Diversifying among UK shares is a simple process. Any investor can build a portfolio containing multiple companies that operate in different sectors. This reduces their reliance on one business for returns. This means one struggling holding is unlikely to be too detrimental to their overall financial prospects.
Building a diverse portfolio of buy-to-let properties is far more difficult. An investor needs vast sums of capital to do so. Even then, they’re limited to investing in the UK, whereas it’s possible to buy companies operating in different countries. Should there be an issue with rent payment or repairs to one property in a concentrated buy-to-let portfolio, it could mean financial disaster for an investor.
Tax advantages of buying stocks
Purchasing UK shares through a Stocks and Shares ISA means there’s no tax levied on returns or income payments. This is a much more favourable situation to that of buy-to-let investing.
Various recent tax rises mean a property investor’s tax bill is likely to be much higher now than it was even a few years ago. With the cost of coronavirus yet to be confirmed, further such tax rises could be ahead.
As such, opening a low-cost ISA that’s simple to operate could be a better idea than purchasing buy-to-let properties. It could produce significantly higher net returns that have a positive impact on an investor’s financial outlook.
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