HMRC announces major shake-up in the treatment of tax-free ISAs

The taxman has scrapped enforcing a ban on tax-free individual savings accounts (ISAs) from holding less than a full share of a stock ahead of an expected rule change by the government.

The move is expected to encourage investment in shares, particularly among young adults, who are keen to buy a stake in high performing tech companies but might not have the funds to buy expensive individual shares.

For example, a single Apple share comes at $222, Tesla is around $210 and Nvidia is trading at $108, which means buying a basket of these shares can take a large chunk of an individual’s investment pot.

However, a number of UK-based trading apps offer investors the ability to buy into the success of these firms, which have seen huge increases in the stock market value, by buying fractions of a single share for as little as £1.

Historically, HM Revenue & Customs ruled that these so-called fractional shares could not be held in an ISA with the result that the owners could not benefit from tax free gains on these investments.

But the tax authority has now reversed its position ahead of an expected change to the law which may come into force as early as September 30, according to draft secondary legislation seen by the Financial Times.

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.

He said: “Fractional shares enable investors to build a diversified portfolio and access a wider range of investments. We’re pleased to have worked closely with government and HMRC to reach an outcome that benefits retail investors in the UK.”

It is hoped the move will 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.

The 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.”