Fractional shares in an ISA

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It’s time to collaborate and sign this petition of sorts: do the needful and follow the instructions below :arrow_down:

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@Alpha good idea but I think I would amend my letter.

Off the top - you can have a fraction of a share in a mutual fund (ICVC/OEIC), so why not an ETF, CEF, VCT or any other kind of listed share - why make the distinction one is allowed and the other(s) not?

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The short answer is ‘legals’

The long answer is it’s the contractual structure of the transfer of ownership from the buyer of the whole share to multiple fractional underlying recipients. This contract reads very much like a derivative (as the whole share remains with the original buyer but the value is contractually passed on). Since you can not register a fraction of a share with a Registrar (why not – we should – this is a change that should happen) the legal owner remains the buyer of the original whole share, You (the end retail client) do not own the share (yes, yes. nominee structure obscures that any way and so on and so on
 I know, I know). The ‘way’ you do own it is via a contractual arrangement between the buyer and you. So, er, a derivative. Derivatives are not allowed in ISAs.

The Freetrade letter skims passed this. Probably because it’s technical and very boring and the aim is to rally the troops against the monster that is HMRC regulation.

However, whilst this ‘rule’ is nonsense and unfair and should be changed the rules as they stand right now do appear to make fractions incompatible with ISA wrappers.

It will take a tweak to the rules. That’s all. HMRC needs to threaten it (they have). Look tough (er, well). And then ‘compromise’. Standard game tactics. What that ‘compromise’ is is any ones guess. A fine? Paid by the brokers? Spare the retail consumer? HMRC bags some cash and walks away and tweaks the rules from here on out? Let’s see. The option of voiding everyones ISA, fining retail consumers and destroying portfolios feels OTT. So that’s not a good look. So there is a compromise to be had here for sure.

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@haggis_mince thanks for a really helpful explanation.

If fractional shares are essentially derivatives why do we have to pay stamp duty? The legislation for stamp duty is more precise than the more vague legislation for share isas (which simply refers to shares) and I don’t believe (I could be wrong) that stamp duty is due on derivatives. Thus if HRMC want to argue that fractional shares aren’t allowed in an ISA then doesn’t it follow that stamp duty isn’t due (if buying fractional shares in Invest accounts)?

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I saw on another broker forum that they are encouraging users to submit letters to the government to clarify the position on fractional shares in an ISA and that they should be accepted as qualifying investments.

Is Trading212 taking the same proactive approach?

Like to the other discussion. Not sure if that’s allowed. But would be useful for T212 to take a similar approach and email all its users for assistance also.

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Suggest you keep an eye on this similarly named thread:

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“Fractional shares” could have several forms, e.g., derivatives contracts, “crypto shares” (tokenization of stocks) and co-ownership schemes, aka “book” fractions made by the broker through buying full shares and maintaining those in the broker’s books, and attributing internally the shares’ fractions to their customers.

Btw, it isn’t only the British tax authorities that are pursing the label “fractional shares”. Regulators are watching this innovation/marketing label.

https://www.esma.europa.eu/press-news/esma-news/esma-publishes-guidance-fractional-shares

So it would be extremely interesting knowing from @Team212 , which structure it adopts for their “fractional shares”.

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Very good point. However, someone has bought the whole share. In this example - T212. So they are passing on the cost to you. It’s not that you are paying the sdrt on a derivative, it is that T212 have already paid the sdrt on the whole share purchase and passing it proportionally to you.

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@haggis_mince I understand that someone bought the whole share and paid stamp duty. However, it would be interesting (and important) to know whether the “stamp duty” charge made by T212 is passed to HRMC or the whole share owner and whether HRMC expects stamp duty on fractional shares.

There is an important point here (I think) because the whole share owner may hold that share for a long time and resell fractions of it multiple times this they probably don’t resell a particular fraction once. Thus if they charge stamp duty they will gain more than the original stamp duty paid on the whole share purchase. Thus if this being mislabelled when the fraction is sold to use and isn’t stamp duty it goes to the owner of the fractional share who over time may make a profit on these charges or is hmrc collecting the stamp duty on the fractional shares in which case I think it undermines their argument that fractional shares don’t class as shares that can be held in an isa

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FT article on this:
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Article Title: HMRC clashes with young investors over Isa rules

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Even if the fractional shares won’t be allowed on the ISA, it doesn’t mean that UK investors can’t invest in fractional shares. They can still buy fractional shares in GIA.

In the end it’s a tradeoff between share price and tax benefits.

Or buy full shares with low price tag in ISA and buy fractional shares with high prices on GIA.

Btw, the SIPPs also have any fractional/full share thingy of the HMRC?

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Not that I’ve heard. Sipps tend to be more liberal in terms of what you can hold. For example, you can buy the likes of TSM in a Sipp but not an Isa.

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We understand the growing concerns among our clients regarding HMRC’s potential actions surrounding the holding of fractional shares within ISAs. Therefore, we want to address and clarify our position on this matter:

We firmly believe that fractional shares are ISA-eligible instruments. We are actively engaging with HM Treasury to review this situation, especially given HMRC’s view seems contrary to the UK Government’s objectives.

While this issue gets clarified, we plan to continue allowing you to trade fractional shares in ISAs.

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Good points, Damien has reached out to Trading 212.

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I recommend this article by Dan Needle, a tax expert. I learned a lot from reading it, especially about how share ownership actually works.

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Thanks, great write-up that, I too learned a lot.

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Ha! I was writing a similar piece for recording this week. Might as well just reference this!

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We need someone who has Martin Lewis’ ear to get him involved :grinning:

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HMRC have little incentive to actually listen to people. I would have thought emailing the local MP or Jeremy Hunt would be far more effective. Jeremy Hunt has said that he would like to overhaul ISA to radically improve them and make them more accessible for more people. That isn’t going to happen by preventing fractional share ownership within the ISA. HOWEVER, in part, his goal appears to be to encourage investment in UK companies so he may not be very interested in a plea to allow ownership of fractional shares in US companies - he wants to boost UK companies

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My email to Mr Hunt – huntj@parliament.uk

Dear Mr Hunt

I note recent headlines that say that you would like to overhaul ISAs. There is a significant issue concerning current share ISAs that I believe you need to urgently address to avoid huge numbers of UK investors getting very angry.

For years, many share ISA have allowed people to buy and sell fractional shares within their ISA. However, there are media reports that HMRC want to re-write the rules to prevent fractional shares being held in ISAs. In my opinion, this would be a terrible mistake and would alienate many people who would like to use share ISAs. It would be discriminatory against smaller investors and savers. If a company’s shares cost many hundreds or thousands per share then it essentially puts share ownership of those companies out of the reach of smaller investors. Also, the change caused by the introduction of such a rule would be highly disruptive and in my opinion cause massive anger with people who currently have share ISAs.

Currently the purchase of fractional shares also involves (where relevant) the payment of stamp duty even though the legislation for stamp duty only applies to whole shares. Thus, if HMRC are going to change the rules to prevent fractional shares in ISAs are they also going to scrap stamp duty on fractional shares in regular investment accounts?

If you want to encourage wider participation in share ownership and saving via ISAs then you will urgently ensure that the rules for ISAs clearly allow fractional shares.

Regards

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