The appeal of buy-to-let investments has declined significantly in recent years. Tax changes, lower yields and increasing risk from a challenging outlook for the UK economy mean that many investors may be better off buying shares through a Stocks and Shares ISA.
The ISA offers greater tax benefits, while a number of FTSE 350 shares offer yields that are in excess of those available on property in many regions of the UK. And, with an international focus, you may be able to diversify more easily with shares than a buy-to-let.
Tax appeal
A Stocks and Shares ISA allows you to invest up to £20,000 per year, with any dividends, income or capital gains from within the portfolio not being subject to tax. Sounds good? This could save an investor significant sums of money in tax payments over the long run when compared to a buy-to-let investment.
Indeed, an additional 3% in stamp duty is payable on the purchase of all second homes. Meanwhile, there is more limited scope to offset mortgage interest payments against rental income, which is likely to reduce the net returns available for many landlords.
Although there is the potential for property taxes for buy-to-let investors to change under a new Chancellor, the lack of supply of new homes means that there may continue to be a political consensus which aims to make it easier for first-time buyers to get onto the property ladder. As such, major changes that reduce the tax burden on buy-to-let investors may be somewhat unlikely.
Income potential
With property prices having risen significantly over the last decade, the yields available in many parts of the UK are relatively low. Certainly, they are likely to be above and beyond cash returns and bond yields, but they may fail to beat a range of FTSE 350 shares in the long run.
Indeed, a relatively large number of mid and large-cap shares currently offer yields that are in excess of 5%. Since dividends are not taxed when shares are held in a Stocks and Shares ISA, the net return from the stock market is relatively high compared to property, with rental income being subject to income tax. This could mean that buying and holding shares provides a greater net income return than a buy-to-let investment.
Diversity
Buying a large number of properties in order to reduce risk is unlikely to be possible for the vast majority of investors due to the cost involved. However, building a portfolio of stocks that operate in different geographies and industries is a far more achievable goal.
Therefore, shares could offer less risk, as well as higher income returns and greater tax efficiency than buy-to-let properties. As a result, now may be the right time to focus on the stock market when seeking to build your retirement nest egg.