Being invested has never been more important / Buy-to-let property versus stocks & shares investments

21 September 2022

In my experience of providing financial advice, the title of this blog tends to send you one way or the other. Perhaps like water and oil, sometimes investors do not mix their streams and if they do, the emulsion created might be a bit sludgy. I am also not convinced that 'versus' in the title is correct, because each has its merits, and some engage happily in investments in both opportunities.

When making any investment, invariably the investor is looking for annual yield, capital growth or both. The ways these may be achieved vary, particularly in the two areas we are considering. With inflation currently raging, the need to be invested to create the opportunity for real returns has never been more important.

One important point that should be noted is that buy-to-let property and stocks & shares are very different types of assets both in terms of the way in which returns may be provided and in how the economic climate may affect returns and capital values. This diversification might be one reason to consider investment in both areas. Both should normally be viewed as longer term investments and you will be aware that the value of most investments, property and stocks and shares, along with the income they produce, can fall as well as rise and is not guaranteed.

Buy-to-let residential property

Residential property has the advantage of being tangible. You can see it, visit it, and keep an eye on the tenant if you want, within reason. Just as an aside, if it is purely a commercial property, this can be purchased by a pension fund and we have seen firm interest in this avenue of investment, especially for owner-occupiers.

The tax advantages for residential buy-to-let arrangements, particularly those with mortgage finance, have changed, and since April 2020, it has no longer been possible for a private landlord to deduct any mortgage expenses from their rental income to reduce their tax bill. Instead, a tax credit is available based on 20% of the mortgage interest repayments on a buy-to-let mortgage. This is less generous for higher-rate tax payers than the previous system, which effectively allowed those higher earners to claim 40% tax relief on their mortgage payments. More information may be found here: https://www.which.co.uk/money/tax/income-tax/tax-on-property-and-rental-income/buy-to-let-mortgage-tax-relief-changes-explained-atnsv0j6j782

If the tenant doesn't pay, or there is a void period with no tenants, then annual returns can fall. It should be noted also that a change in the law in April 2022, gives private tenants greater rights, as detailed here: https://www.gov.uk/private-renting/rent-increases

It's important to bear in mind that the entry costs to investing in property can be high, when taking into account legal and other professional fees, the surcharge of 3% on stamp duty on purchasing a second or subsequent residential property, and any repair and redecoration costs. Ongoing maintenance costs must be taken into account, and the property may experience void periods where a tenant is not in place. In addition, if a residential property is the only investment asset held by an individual, this concentrates investment risk in one asset class. If funds are needed, it could take time to sell, it could be a poor time to sell, hence achieving a lower sale price, and there is a surcharge of 8% on capital gains made above the annual exempt amount (currently £12,300). Remember that this tax now has to be paid within 60 days of the sale of the property.

Stocks & shares investments

Stocks & shares holdings may be less tangible – you can't go and visit the bricks and mortar in the same way as a property – however, the entry cost is likely to be significantly lower. Your investment can be spread across a range of investment funds to suit your attitude to investment risk, your capacity for loss and your aims and goals for the future. This allows diversification within the portfolio, and the use of tax allowances, such as tax efficient ISAs, can be built into the planning. Investment funds are easier to sell than property if funds are required, and if a portfolio is invested in a wide range of holdings, sales can be selective rather than across the board. Capital gains tax on investments outside ISA arrangements applies, as for residential property, and the annual exempt amount is available. There is no capital gains tax surcharge on capital gains made through the sale of stocks & shares investments and no requirement to pay the tax due within 60 days of the sale, as with residential property.

However, as you will be aware, stock market values can fall as well as rise, and market volatility will cause the value of stocks & shares holdings to fall as well as rise over time. In addition, some investment funds or shareholdings may experience performance issues over and above market movements, and performance is never guaranteed.

A choice, or a combination?

These notes may lead some to ask, which is better? As you can see from the notes above, both types of investment have their merits and disadvantages which can change over time. Therefore, we have had many investment discussions during which the answer has proved to be a combination of both.

Before investing either way, speak to the team at Chapters Financial about your needs and objectives for your capital into the future. No individual advice is provided during the course of this blog.

Keith Churchouse FPFS
Director
CFP Chartered FCSI
Chartered Financial Planner

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