HMRC had a meeting with the Treasury last week. They discussed fractional shares: that they do not belong in Individual Savings Accounts (ISAs) because they don’t meet ISA regulations. This means, potentially, that they should be taxed.
This is a big deal. Why? ISAs are meant to be tax-free! So let’s figure out what the heck is happening and leave the panic at the door (or better yet, at the disco) because it’s a lot to digest and there’s lots of jargon.
An Individual Savings Account (ISA) is a type of savings account where you can save £20,000 a year, tax-free. This means you don’t have to pay tax on any profits you make from it.
In this blog, we’re specifically talking about Stocks and Shares ISAs.
HMRC’s view on fractional shares in S&S ISAs has been the talk of the town over the last few months – but not in a good way. Considering Jeremy Hunt plans to simplify ISAs, which will be announced at the Autumn Budget that’s creeping up, many expect a clarification.
All in all, things look cloudy at best. The Financial Times reported that HMRC had a meeting with “industry figures and Treasury officials” where they doubled down on their opinion that tax-free ISA accounts shouldn’t hold fractional shares. It’s quite a confusing subject in general and you need a lot of existing tax/ISA/shares knowledge for it to make sense.
A share is a piece of a company. They’re also sometimes called stocks. If you own a share, you’re a shareholder. You can get shares by:
A fractional share is just a fraction of a share. In other words, it means an amount of a share that doesn’t add up to a whole share.
Many platforms don’t allow investors to buy fractional shares. Newer platforms aimed at young investors, like Moneybox, Freetrade, Trading212 and InvestEngine do.
If someone wants to buy a share of Amazon but can’t invest too much all at once, they can buy portions of it. If you buy half an Amazon share every month from January and end up with 6 Amazon shares at the end of the year in December.
Being able to have access to fractional shares allows you to build wealth over time and diversify your investments within your own financial means.
Interestingly enough, this issue was actually raised earlier this year, when HMRC raised concerns over The Individual Savings Account Regulations 1998. It was brought to the public’s attention in July 2023.
Investment apps allow you to buy fractional shares but technically you don’t own them. You only have a right to a fraction. It’s actually called a contract for difference (CFD).
A CFD is:
HMRC is arguing that according to 30-year-old ISA regulations, derivatives can’t be part of tax-free ISA offerings.
This Is Money reports that an HMRC spokesperson said “fractional shares cannot be held in an ISA. ISA managers must make sure the investments they offer are ISA eligible”.
Good question. Although the investment platforms that offer fractional shares in their ISAs are regulated by the Financial Conduct Authority, no issues were raised.
ISA regulations do not specifically allow or disallow fractional shares. If HMRC interprets the legislation differently than the brokers did, it begs the question: shouldn’t HMRC or the FCA have let the brokers know there’s a grey area in some of their offerings and refuse to allow them to offer fractional shares in their ISAs?
Hopefully not. Thanks to HMRC’s ambiguous statements, no one is quite sure what they’re thinking and how they expect to move forward.
There are a few options on how they could proceed, but without any confirmation, it’s speculative:
HMRC can either ban fractional shares from being offered in ISAs or leave them – it’s a waiting game until it isn’t.
If it’s eventually decided that you do need to pay tax, you’ll need to do it by filing a Self Assessment tax return. However, there’s no need to worry just yet. More than likely, if there is tax to be paid, HMRC will require the ISA managers to pay it.
Limiting the investing opportunities of people trying to better their future can be unpopular – especially when it affects the smaller and younger investors most.
Hunt is due to address this in the Autumn Budget as part of his plan to make investing more accessible in the UK. Let’s hope HMRC are also on the same page. We’ll know more on 22nd November, but until then, we’ll keep you updated on any changes!
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