Tax changes continue to make buy-to-let investing less appealing. The recent Budget saw the Chancellor make changes to private residence relief, which means that shared occupancy is now required in order to shield up to £40,000 of capital gains from tax. And with mortgage interest payments no longer being tax deductible from 2020, it seems as though life is going to get even tougher for landlords.
In contrast, the FTSE 100 could provide not only high total returns in the long run, but investors may be able to capitalise on its prospects through a variety of tax-efficient products such as ISAs and SIPPs.
Tax changes
With house prices continuing to move higher across the UK as a whole, buy-to-let landlords may be able to generate further capital growth over the coming years. Certainly, the UK’s economic outlook is relatively uncertain at the present time. But a fundamental shortage of homes could mean that demand continues to outstrip supply, which could lead to rising house prices if interest rates remain low.
The problem facing buy-to-let landlords, though, seems to be political risk. There’s a general consensus in the political arena that second home ownership is hurting the chances of first-time buyers getting onto the property ladder. It’s also seen as a relatively easy tax grab, and so it seems likely that further tax changes could be ahead over the next few years, reducing profitability for operators in the sector.
Already, stamp duty changes, more stringent borrowing requirements, and changes to mortgage interest deductibility have made life tougher in the buy-to-let industry. Further tax changes could cause the risk/reward ratio to move even further against an investor.
FTSE 100
In contrast, the government seems to be making investing in the FTSE 100 and other shares more efficient from a tax perspective. The annual ISA limit stands at £20,000 after a number of increases in recent years, while a SIPP provides significant tax benefits for individuals seeking to build a nest egg for retirement. The rules on how withdrawals from a pension can be made have also been changed in recent years, with there being greater flexibility for retirees.
Although the FTSE 100 has experienced a challenging period in recent months, it continues to offer long-term growth potential. Its international exposure could provide buy-to-let investors with reduced risk during the Brexit process, while a dividend yield of around 4% suggests that the index offers good value for money. And with it never having been easier or cheaper to buy stocks, now could be the right time to switch from buy-to-let to investing in shares.
Certainly, share prices can be more volatile than house prices. But with political risk high, and set to remain so over the coming years, the appeal of buy-to-let seems to be declining. As such, the risk/reward opportunities available through the FTSE 100 could be more enticing, I believe.