- Isa providers pushing back against HMRC’s position on fractional shares
- The government could clarify the rules in the upcoming Autumn Statement
The rules on Individual Savings Accounts (Isas) could be reviewed to explicitly allow for fractional shares to be held in them, helping settle a dispute between investment platforms and HMRC.
Freetrade, Moneybox and Trading 212 all offer customers the option to buy portions of shares in Isas, making it easier for small investors to gain exposure to expensive stocks, especially those listed in the US. All the ‘magnificent seven’ stocks are priced at more than $100 per share, with Nvidia (US:NVDA) the most expensive at around $470. One share in Chipotle Mexican Grill (US:CMG) costs a whopping $1,780.
HMRC maintains that fractional shares cannot be held in an Isa according to the existing rules. The platforms have disagreed with the body’s interpretation and hope the Treasury will clarify the matter.
Brian Byrnes, head of personal finance at Moneybox, said: “We believe that there are plans in the not-too-distant future to review this legislation. We hope that gives us clarity and a very pragmatic response for firms and for investors.”
Freetrade said the Autumn Statement, scheduled for 22 November, would be the "perfect opportunity" to reform the rules. The platform has encouraged customers to lobby the Treasury on its behalf.
The Treasury said: “It is important that Isas encourage people to develop a savings habit and to invest in a way that works for them. As with all aspects of policy, we keep the rules on which assets are eligible for Isas under constant review.” There are no “immediate” plans to change the rules on fractional shares and Isas, it added.
The current Isa legislation was written before fractional shares became mainstream. The list of qualifying investments includes shares without stating whether they need to be whole or can also be fractional.
HMRC said it would seek to recover the tax lost from the platforms first, so it is unlikely that investors would be asked to foot the bill. But they may have to choose between selling the fractional shares or holding them outside the Isa, which would then leave them exposed to capital gains and dividend taxes.
HMRC said: “Our long-standing view is that a fraction of a share cannot be held in an Isa. We have engaged extensively with the Isa sector on this issue. When an Isa manager allows investment in non-qualifying assets, we would seek to recover any tax loss from the Isa manager rather than the investor where possible.”
Freetrade argued that fractional shares held in nominee accounts work in a similar way to whole shares. It said HMRC seemed to be under the impression that they are offered in the form of derivatives instead, which cannot be held in Isas.
Adam Dodds, CEO and founder of Freetrade, said: “Our fractional shares give retail customers ownership of a portion of an actual company share. They are not a derivative contract. The protections and benefits for retail investors are effectively the same as for whole shares.”
“It’s a no-brainer that the Isa rules need to be clarified to put this matter beyond doubt, explicitly allowing for fractional shares as a qualifying investment,” he argued.
Moneybox’s Byrnes argued that fractional shares are “an important component” of efforts to make investing more accessible to people. “It's fair to say that all parties, HMRC included, are in agreement that the worst possible outcome here is for consumers to be put off investing by this issue.”
Even if the rules are clarified, HMRC could still try to recover the tax lost in previous years, unless the clarification is somehow retroactive. But the platforms might have grounds to push back. Tax campaigner and lawyer Dan Neidle looked at the technicalities of the dispute and concluded that “HMRC are probably wrong”.
