The recent market crash may have dissuaded some investors from buying UK shares in an ISA. They may, for example, now seek to make a million from buy-to-let property. Especially as government support helps to boost activity in the housing market.
However, buying undervalued stocks today could lead to higher returns. Low valuations, tax efficiency and recovery potential may mean indexes such as the FTSE 100 and FTSE 250 offer greater long-term potential to make a million than buy-to-let property.
Buying cheap UK shares
Although some UK shares have rebounded after the market crash, a number of stocks continue to trade at cheap prices. Therefore, they could offer significant scope for capital growth over the long run. In many cases, companies with strong financial positions and sound long-term growth prospects trade significantly lower than their historic average values. This may present an opportunity for investors to access such businesses while they offer wide margins of safety
Furthermore, when purchased in a Stocks and Shares ISA, there’s no tax to pay on the gains or dividends received from stocks. This could help to further improve your long-term growth rate. Especially with a very real threat of rising taxes to balance the government’s recent increase in spending as a result of the pandemic.
Investing in buy-to-let property
Buy-to-let property is currently less attractively priced than UK shares. In fact, recent gains in UK house prices mean average incomes versus average property prices are close to record levels. With unemployment likely to rise over the coming months, the capacity of potential buyers to afford current prices could decline. As such, house price growth, and even rental growth, may slow compared to its previous levels.
Furthermore, even though the stamp duty holiday may ease the tax burden on buy-to-let investors, this is a temporary measure. Income tax applies to rental income, while capital gains are charged on profits made on the purchase price of a property. Over the long run, this could mean the net return on buy-to-let property is less impressive than that of UK shares purchased in a Stocks and Shares ISA.
Making a million
UK shares have a long track record of delivering high returns. For example, the FTSE 100 has produced an annualised 8% return since its inception in 1984. Assuming that rate of growth on a regular investment of £750 per month, it would take around 30 years to build an ISA portfolio valued at over £1m.
With share prices being relatively cheap at present due to the recent market crash, it may be possible to obtain a higher rate of return in the coming years. This could make indexes such as the FTSE 100 and FTSE 250 even more attractive relative to buy-to-let property. And could shorten the amount of time it takes to make a million.