AN EXERCISE IN PLANNING AHEAD & CHOOSING

BETWEEN INVESTMENTS & STAYING INFORMED

You have $7,000$ of savings which you plan to invest for a period of $20.$

years. You are considering the following alternative investment avenues:

$($i$)$ A stocks and shares ISA, which you expect would provide you with

an average return of $10\%$ p$.$a$.$ over the $20-$year period.

$($ii$)$ Purchase of a property with a mortgage loan of $95\%$ of the property

value, the rent fror h ${?}_i$ which would, after meeting all relevant outgoings

$($including income tax$),$ be just sufficient to repay the mortgage loan with

interest. You expect that you would be able to sell the property for $\frac{21}{2}$

times its value after $20$ years.

You pay income tax at $40\%.$ The personal exemption limit for capital

gains is $10,100$ and the effective capital gains tax payable by you is

$28\%.$

Required:

Evaluate whether the property investment would provide you with a

better return on your investment than the investment in the ISA. What

other considerations might influence your decision?