Fractional shares in an ISA

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Hi,

What’s the T212 stance on this? Any plans?

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This is an interesting development: HMRC is contending that fractional shares are not eligible to be held in an Isa.

Does @Team212 have a position on this?

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Well this makes things exciting.

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What’s to happen with fractional shares in ISAs?

Hopefully this will be resolved in a way that allows us to keep them or at worse allows us to sell the fractional parts without any tax liability.

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I hope so too, hopefully, we’ll continue to be allowed.

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Could really do with a steer from T212 on this.

Will two 0.5 ‘wrongs’ of a stock, over time, make a 1.0 ‘right’, for example?

As to the spurious mathematical logic (disallowing fractions of wholes that are already fractions in themselves etc.), HMRC are clearly out of their minds - at least fractionally so, possibly wholly.

This thread’s important and should be made a ‘sticky’.

Grateful to the OP for raising it.

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Doesn’t look like anyone has a steer at the moment.

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Not even a fraction of one.
Dispiriting stuff.

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The crazy thing is that it took so long for HMRC to do something. It was not like we were deliberately hiding what we were doing from them! A quick search by HMRC at the beginning of this would have found brokers offering fractional shares in ISA. Which they could have then stopped before it became popular.

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I suspect the seniors were partying with our erstwhile Head Cretin and the minions were too busy prepping for the clamp-down on low value savers about to tip-toe over the PSA.

I suppose the least-bad outcome for investors, aside from HMRC simply allowing us to carry on, would be for them to force-stop the practice, without retro-inflicting any pain.

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Here is a question.

What does this apply to - only stocks, so mutual funds and ETFs are ok?(and why) - how about Investment Trusts or other CEFs.

Someone should start a petition if not already that the rules should be simple and consistent for all eligible investments held within an ISA if not already.

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To me the article seems like click bait.

Here is guidance which states what can be held in an ISA last updated April 23.

Not once in this page does it mention anything about fractional shares. (Can anyone find a ‘hidden’ reference?)

If the government did not want to allow fractional shares it should be clearly stated on this page. The article says some “spokesperson” said they were not allowed - ok well show me where it says this officially not by hear say.

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I agree with you trader787, it lumps all eligible exchange traded instruments in with mutual funds. Unless its somewhere else and specifically calls out fractional listed instruments, then there would also be an issue with mutual funds.

Does anyone have a link to the full article that is not behind a paywall? Perhaps whoever wrote the times article was misinformed, and as a result is another brilliant example to not believe everything you read(or watch/hear on YouTube).

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Tens of thousands of Isa investors could face shock tax bills in shares row

Freetrade users may be open to taxation after they bought fractional shares for stock and shares Isas

[ByJames Fitzgerald] 19 June 2023 • 10:00am

Tens of thousands of savers could be hit with tax charges on their Isas after stockbroking platforms were found to have been selling banned investments.

A Telegraph Money investigation has found that [popular investing app Freetrade] is among those allowing investors to buy fractional shares in popular US companies and put them in stocks and shares Isas – which HM Revenue and Customs says is not allowed under legislation.

Around 80,000 British investors have a stocks and shares Individual Savings Account, or Isa, with Freetrade, and a majority of those have at least some prohibited fractional shares in their account.

In total, the stockbroker has around £650m of investors’ cash held in Isas.

Isas allow savers [to put away up to ÂŁ20,000 every year without paying tax on returns]

However, HMRC says that, under Government and tax office rules in place since 1998, investors are not allowed to hold fractional shares in Isas because the tax office only recognises full-shares for tax purposes.

If the tax office does decide to investigate Freetrade for breaking the rules it could mean chaos for investors who unknowingly own the banned shares.

Freetrade or its Isa investors could be ordered to pay [thousands of pounds in capital gains and income tax] if HMRC pursues the stockbroker over breaching legislation.

HMRC could also decide Isas that hold fractional shares are void, and force Freetrade and other stockbrokers to sell the investments off.

The Individual Savings Account Regulations 1998 specify that ‘shares’ are qualifying investments for an Isa.

A spokesman for the tax office said: “It is HMRC’s view that ‘shares’ as referred to in those regulations, relates only to whole shares and not parts thereof, therefore fractional shares cannot be held in an Isa.”

Yet a Freetrade spokesman said it will continue to offer the fractional shares to investors as it does not agree with HMRC’s “interpretation” of the legislation.

He said: “Fractional shares make investing more accessible for savers while offering them the same benefits and material protections that they receive when investing in whole shares.

“Like many other participants in the market, we are of the view that the current Isa rules do not prohibit fractional shares from being held in an Isa. We have engaged with the Government on this and welcome an open dialogue with HMRC and we hope that a sensible conclusion can be reached that benefits all savers.”

The Telegraph understands the City watchdog, the Financial Conduct Authority, is aware of stockbrokers offering fractional shares to Isa investors and is in talks with HMRC.

It will be up to the taxman whether it is the investor or trading platform who has to pay any charges.

Tom Selby, of stockbroker AJ Bell, said: “Our understanding is that existing legislation prevents Isa investors holding fractional shares. While there is an argument for amending these rules, as things stand anyone holding fractional shares within their Isa is at risk of being hit with a penalty from HMRC.

“Any firm marketing fractional shares within Isas without warning investors of the possible consequences has created a potentially sticky situation and customers will inevitably be demanding clarity on who will fund any tax bill that comes their way.”

In a statement, HMRC confirmed to The Telegraph that it was the tax office’s view that trading platforms were breaking the rules by putting fractional shares in Isas, and said it will “take action” if a company is suspected of not complying with the regulations.

HMRC said it can “neither confirm nor deny” whether it is currently investigating any stockbroking platforms selling fractional shares for Isas.

If the tax office does decide to take further action against stockbrokers flouting the rules, Freetrade said fractional shares only make up a portion of its Isa business and it will protect its investors.

The spokesman said: “We will continue to offer fractional shares until this matter is resolved and, should it be required, we will stand behind our customers and ensure that they are at no financial disadvantage.”

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Cheers - it sounds a bit complicated but agree there is nothing on the HMRC website that says you can hold fractional mutual funds, but not fractional listed shares. Probably some plum at HMRC going “I found a way to generate some more tax…”

I’m just going to ignore it - it will however, generate more bills potentially for all brokers who will seek further advice/clarification so I would suggest we all do the same(ignore the newspaper article) unless requested otherwise.

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I just edited it with more text . Doing on my phone so a bit slow. There are quotes from AJ bell. I assume they do not offer fractional shares and are salty.

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HMRC aren’t saying anything. The telegraph is “investigating” and got HMRC to agree with them. (Well one intern they called up probably)

Even if HMRC decide fractional shares aren’t allowed in an ISA I’m sure they would have to clearly amend their guidelines to keep up with the century we are living in now and then give notice to all stockbrokers of the amendment giving everyone time to adhere to the new rules.

Article being dramatic like we are all going to be taxed for not knowing the word “share” doesn’t include a “fractional share” If we are all breaching some clear rule then fair enough but it’s not like that at all. If I was in a courtroom its an easy argument to win for the fractional share side.

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If you Google 12ft ladder you can paste most links into it to get around paywalls.

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It appears since the financial crash, Britain has developed the habit of waking up of every morning with aim of finding new ways to self destruct

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The issue is mostly technical in nature.

Whilst fractionals are not explicitly mentioned in HMRC guidance, qualifying securities need to meet the definition of “Company”. This essentially means ordinary shares (the HMRC states must have “share capital”).

Whilst the WHOLE share is purchased by the Broker… only a fraction is passed to the client. This is administered via a contract legally similar in nature to a derivative. Derivatives are not allowed in ISAs.

This is also a case of regulations not running at the same speed as developments in the industry.

HMRC will either cling to the “derivative” argument or accept the ‘letter versus spirit’ of the law argument.

Wait and see.

I’m 50/50 which way they will go.

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