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The UK tax authority has dropped a ban on investors holding portions of shares in tax-free Individual Savings Accounts, in a move that should help channel more money into stocks.
Although many UK-based investment trading apps offer investors the ability to buy fractions of a single share within Isas, HM Revenue & Customs said last year that fractional shares did not qualify for tax-free accounts.
But the tax authority has reversed its position ahead of an expected change to the law by the UK government. The change may come into force as early as September 30, according to draft secondary legislation seen by the Financial Times.
HMRC said: “The government has committed to changing the Isa rules to allow certain fractional shares. Taking a pragmatic approach, we will not raise an assessment on managers or investors for fractional shares acquired before these changes are made.”
Fractional shares are particularly attractive to younger and less wealthy investors, as they can buy expensive stocks, such as chipmaker Nvidia and technology companies Apple, Amazon and Tesla, from just £1, rather than needing hundreds of pounds to purchase a single share.
The previous Conservative government said in 2023 it would introduce legislation to allow fractional shares to be held in Isas but did not do so before the July 4 general election.
Last month HMRC confirmed, while consulting with investment platforms, the new Labour government plans to introduce the same legislation.
HMRC’s decision, first reported by Bloomberg, was welcomed by investment platforms. Viktor Nebehaj, chief executive of Freetrade, said a “sensible resolution” had been reached.
“Fractional shares enable investors to build a diversified portfolio and access a wider range of investments,” he added. “We’re pleased to have worked closely with government and HMRC to reach an outcome that benefits retail investors in the UK.”
The move should also help channel more savers’ cash into investments, as part of a broader effort by the UK government to boost retirement pots for individuals by opening access to stock markets.
Analysts and consumer champions have said that small investors have been left at a disadvantage to institutions because of HMRC’s previous stance on fractional shares.
Paul Killik, founder of broker Killik & Co, said that individuals have been shut out from some of the world’s most attractive stocks as a result.
Under current rules, individuals can save or invest up to £20,000 into an Isa each tax year, split between cash and investments. No tax is payable on savings interest, dividends or capital gains, and withdrawals are not subject to income tax.
