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  /  Editor's Pick   /  Buy-to-let faces new tax attacks! That’s why I’d invest in FTSE 100 shares instead

Buy-to-let faces new tax attacks! That’s why I’d invest in FTSE 100 shares instead

Middle-aged white man pulling an aggrieved face while looking at a screen

Investing in FTSE 100 shares has always been my preferred wealth generation strategy over buy-to-let. And following the latest tax changes for landlords earlier this year, the case for stock investing has only strengthened.

Let’s take a closer look at what’s actually happened. And why investing in the stock market, in my opinion, is the better option.

Why I’d buy FTSE 100 shares instead of real estate

In the last decade, the UK housing market has been tremendous. House prices have surged, making it a cash cow for those able to afford multiple mortgages.

Being a landlord isn’t fun, but buy-to-let homeowners have seen their wealth growing (as have shareholders in homebuilding stocks).

Yet new tax laws for buy-to-let mean some landlords have watched their returns evaporate. And when a property is sold, capital gains tax can dent the returns.

Under normal circumstances, investing in FTSE 100 shares, or any stock for that matter, is subject to similar tax treatments for capital gains and dividends. But this entire drain on wealth can be bypassed using a Stocks and Shares ISA. In fact, I don’t have to declare any of my investment profits on my annual tax return with this tax-efficient account.

Please note that tax treatment depends on the individual circumstances of each client and may be subject to change in future. The content in this article is provided for information purposes only. It is not intended to be, neither does it constitute, any form of tax advice. Readers are responsible for carrying out their own due diligence and for obtaining professional advice before making any investment decisions.

Over the long term, eliminating tax expenses makes a huge difference in the wealth compounding process. But the question now becomes, do stock investments outperform rental real estate?

Stocks versus real estate

The track record of stocks versus real estate is an ongoing debate with no clear answer as to which has delivered the best returns. There have been years where FTSE 100 shares have vastly outperformed. But, during other periods, the opposite was true.

Looking at the Nationwide House Price Index reveals that between 2015 and 2020, house price appreciation plus rental income generated slightly higher profits than the FTSE 100 total return index. However, after taxes are considered, owning FTSE 100 shares in a Stocks and Shares ISA delivered significantly higher returns.

But this relationship flipped when the stock market crashed in early 2020. Share prices plummeted as lockdowns came into effect, whereas housing prices remained relatively stable. Yet, FTSE 100 investors who started buying shares after the Covid crash are now outperforming real estate again. And that’s even with the economic turmoil we’ve had so far this year.

So what does this all mean? Buy-to-let is a perfectly valid and proven strategy for building wealth. And during times of economic turmoil, it can be a safe haven from volatility. But it requires quite a bit of starting capital and introduces several headaches along with taxes that can be entirely bypassed when investing in shares.

The latter is risker. But it comes with a higher return potential and greater diversification opportunities outside the housing market. That’s why I believe owning FTSE 100 shares is the better option for building my personal wealth.

The post Buy-to-let faces new tax attacks! That’s why I’d invest in FTSE 100 shares instead appeared first on The Motley Fool UK.

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Please note that tax treatment depends on the individual circumstances of each client and may be subject to change in future. The content in this article is provided for information purposes only. It is not intended to be, neither does it constitute, any form of tax advice. Readers are responsible for carrying out their own due diligence and for obtaining professional advice before making any investment decisions.

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.