Legally speaking, Iâm not so sure about the legal form of âfractional sharesâ, are they really shares (shares of shares)? Or a contract/derivative (with a share as underlying asset)?
Maybe T212 could enlighten us about the legal form of âfractional sharesâ?
As I understand it, this all boils down to legal interpretation of the meaning of âsharesâ in the 1998 Isa regulations. Itâs not totally unreasonable for HMRC to argue that that doesnât include fractions. Iâd imagine this could be easily solved with a technical clarification amendment â hopefully, it wonât end up in the courts.
there are three issues against HRMC on this. First is a clear argument that excluding fractional shares from the interpretation of the word shares is discriminatory (if a share is $10,000 per share rich people can afford whole shares others canât). Second, if you have splits/restructing⌠then what happens if you did have an integer number of shares but end up with a fractional number through no fault of yours. Third, HRMC isnât harmed. If they are happy for you to have 1 share in a company in your ISA where is the harm caused by you having 0.5. The legislation does not exclude fractional shares from being in an ISA
Spot on. This is what it comes down to.
Or to put it more simply, âwhat is a fractional shareâ
In legal form itâs a derivative at the moment.
For example, it appears that according to Indian Law, the fractional shares arenât allowed, at least fractional shares of Indian companies:
A fractional share refers to a part of a whole, which means less than one share unit. Fractional shares may arise due to corporate actions like mergers, issue of bonuses, or rights issues. The Companies Act does not permit holding of fractional shares. Section 4(I) of CA-13 reads thus: âthe amount of share capital with which the company is to be registered and the division thereof into shares of a fixed amount and the number of shares which the subscribers to the memorandum agree to subscribe, which shall not be less than one share."
Furthermore, Section 4(1)(e)(i) restricts the ability of subscribers to hold fractional shares. âExcept as required by law, no person shall be recognised by the company as holding any share upon any trust, and the company shall not be bound by, or be compelled in any way to recognise (even when having notice thereof) any equitable, contingent, future or partial interest in any share, or any interest in any fractional part of a share, or (except only as by these regulations or by law otherwise provided) any other rights in respect of any share except an absolute right to the entirety thereof in the registered holder."
You can buy a fractional share of Apple, a US-listed company, from India but you cannot buy that of, say, Nestle India (which is currently trading at âš20,515.)
Source:
The million dollar question, would be, does the British Corporate Law allow fractional shares of British companies? As it seems, according to the above article, the US legislation allows fractional shares of US companies. If British Law allows fractional shares of British companies, the ISA eligibility of fractional shares of UK companies and from other countries would be more probable.
I raised this with T212 a couple of days ago after reading the article in The Telegraph.
I got a reply just now :
Thank you for your patience.
The ISA regulations do not prevent holding fractional shares in an ISA. The term âshareâ is not defined within the regulation itself, and while HMRCâs view is that a âshareâ must mean a whole share, Trading212 and other market participants believe a share can mean a fraction of a whole share.
We have been discussing this issue with HM Treasury and will continue to do so until such time as there is a resolution. In the meantime, we will continue to monitor the situation and update clients if needed.
Thank you for your understanding.
The Indian legislation is explicit (but still leaves some ambiguity) whereas UK legislation on refers to shares. I would love to know how I can buy a BRK.A share if I canât buy and hold fractional shares.
In terms of the lets consider an analogy:
Legislation: food including ⌠share be exempt of VAT or zero rated whereas other goods shall have VAT at 20%
Shop to HMRC: So cauliflowers is zero rated for VAT
HMRC: Yes
HRMC to customer: You have to pay 20% VAT because you bought half a cauliflower and a pack of broccoli florets
Customer: But they are food
HMRC: Its only free of VAT if you buy whole cauliflowers otherwise its 20% VAT
UK legislation only says that ISA can hold shares and will be free of capital gains tax.
I disagree. Itâs extremely common for official statements to be attributed to the organisation, as here, rather than a named person within said organisation.
Trading212 have spoken:
Mukid Chowdhury, chief executive of Trading 212, says the company had taken legal advice and believes fractional shares are well within the remit of existing Isa regulations.
He says: âTrading 212 is actively engaging with HM Treasury to review this situation, especially given HMRCâs view seems contrary to the Governmentâs objectives. We have also sought to engage the Economic Secretary to the Treasury, Andrew Griffiths MP, on the matter.â
Source:
It seems that HMRC is trying to discourage UK investors from piling their cash into the likes of Tesla, Berkshire, Google and maybe US stocks in general.
Come to think of it, it not a bad idea to promote investing in UK stocks to develop the UK economy.
And if you choose to invest in US stocks, then you loose the ISA Tax wrapper - seems a bit fair but controversial 
Apologies if these are stupid questions, but I am still learning. Do we have any idea what would the HMRC may attempt to tax people on? Isnât it usually only when you sell above CGT or if your dividendâs for a year go over a certain amount? Or are they looking just to tax anybody who has fractional shares regardless of CGT or dividends?
Do we think the HMRC will still look to penalise people even if the fractional shares are rounded up to whole shares before the end of the tax year?
Any thoughts are greatly appreciated.
This has nothing to do with US vs. UK stocks. Trading212 (and others) offer fractional shares of UK stocks as well.
No, these are not stupid questions. Indeed, as I mentioned earlier in the thread, this decision by HMRC is opening a horrendous can of worms. At the moment, there is no clarity at all about what the consequences will be. Hopefully someone in government will bash some heads together at HMRC and tell them to stop being so ridiculously daft.
100% agree. Iâm sure all brokers are working for us, individual investors. We need to trust what they do. As they have said they have all had legal advice prior to offering fractional shares in companies and mutual funds(registered as Investment Company Varied Capital), so why the change now? Itâs a huge change if individual investors canât be allowed to buy fractional shares in either.
It would be akin to forcing companies to stock split to reduce their share price is a really old fashioned / expensive way to work round it. It would also hurt the UK fund market, possibly more so than Brexit.
just a thought: the legislation only refers to shares. The issue about fractional shares is just an interpretation of what constitutes âsharesâ. The legislation governing stamp duty (as far as I know I havenât read it all) only refers to shares (and securities). So if âsharesâ in the context of ISA doesnât include fractional shares does that mean you can buy fractional shares without stamp duty? Obviously the same âinterpretationâ should apply
I have only just opened an ISA two weeks ago and havenât invested much at all so any tax so far isnât really an issue, however for people in my situation it seems Iâm now stuck because Iâm not sure Iâd want to invest any more on the platform in case they void the ISA status but if I understand it right your only allowed to open 1 Stocks ISA per tax year and only pay into 1 too so supposedly this means I now have to wait until April to move to another platform?
It seems your issue is not with the platform, but an understandable concern about what this HMRC stance will mean. If you are sufficiently concerned to consider moving platform, you should consider instead just making sure that you only buy full shares. I donât see any need to change provider.
As @Dr.HD says the solution for you is very simple - just invest in whole shares. If you thought that the solution was to change to a platform that only allowed you to trade whole shares then staying with T212 and just trading whole shares is no different.
I think this is where my understanding of how the platforms using fractional shares works is unclear. People have talked about the way in which the fractional shares works is that they are derivatives and its actually this that HMRC has a problem with. So if I buy a whole share is this still technically a derivative? or is buying a whole share using a different process under the hood which ensures it doesnât fall fool to HMRCs rule?
If I could get clarification that buying whole shares within the ISA wrapper is not going to be a problem for certain, then yes I will just carry on only using whole shares.