The recent change in government has raised further questions about the treatment of fractional shares in ISAs.
Under the ISA Regulations, SI 1998/1870, reg 7, only certain ‘qualifying investments’ may be held in a stocks and shares ISA. In particular, reg 7(2)(a) specifies that this includes certain ‘shares’.
Contrary to the understanding of many within the industry that fractional shares should be treated in the same way as whole shares for the purposes of the ISA regulations, HMRC, in October 2023, publicly set out their view that a ‘fraction of a share is not a share and therefore cannot be held in ISAs’.
The policy reason behind HMRC’s interpretation is not obvious. A key benefit of fractional shares is that they make it more affordable for taxpayers to invest in companies where the price per share may be very high (which is particularly an issue in respect of some US companies). Following public pressure, the previous Conservative government announced at the Autumn Statement in November 2023 that it intended to ‘permit certain fractional shares contracts as eligible ISA investments’ and would engage with stakeholders on the implementation of new legislation. However, no timescale was attached to this commitment and, although it was initially hoped that any changes would be introduced with effect from the start of the 2024/25 tax year, it was later confirmed at the Spring Budget in March 2024 that legislation would not be introduced before the end of this summer (notwithstanding that any actual amendments to the current legislation are expected to be relatively minor).
The subsequent General Election has cast further uncertainty on this issue. Although there have been some recent press reports suggesting that Labour would support the previous proposals on fractional shares, there has been no official policy announcement and the position may not be confirmed until the Autumn Budget.
In any case, it is important to flag that any changes to legislation on fractional shares are unlikely to be made retrospective. Given HMRC’s interpretation of the current legislation, therefore, it would still be expected to make assessments for earlier periods and in practice HMRC is likely to pursue the relevant ISA account manager for any unpaid tax rather than investors. As a matter of law, assessments on ISA account managers would strictly involve paying the full amount of tax and voiding the affected ISAs, meaning that investors would need to be informed that the tax-free wrapper on their ISA has been removed. As an alternative, however, HMRC may offer the ex-statutory ‘simplified voiding’ procedure, which would allow the ISA account manager to pay amounts based on a standard formula and ‘repair’ the affected ISAs so that they are not voided (in which case investors may not even be aware of the issue with their accounts).
The normal four-year rule for discovery assessments would apply, with potentially longer periods if there is deemed to be ‘careless’ or ‘deliberate’ behaviour involved. This means that, depending on the ISA account manager’s business, the amounts payable under either the strict statutory approach or the ‘simplified voiding’ procedure could be material. Late payment interest and potentially tax-geared penalties would also apply. HMRC also have the power to issue notices to withdraw ISA account manager approval in certain circumstances, which could clearly have a catastrophic effect on those businesses. ISA account managers have the ability to appeal any such assessments or notices, and there are very good arguments that HMRC’s interpretation of the current legislation is wrong in law.
Home >Articles > What next for ISA fractional shares?
What next for ISA fractional shares?
The recent change in government has raised further questions about the treatment of fractional shares in ISAs.
Under the ISA Regulations, SI 1998/1870, reg 7, only certain ‘qualifying investments’ may be held in a stocks and shares ISA. In particular, reg 7(2)(a) specifies that this includes certain ‘shares’.
Contrary to the understanding of many within the industry that fractional shares should be treated in the same way as whole shares for the purposes of the ISA regulations, HMRC, in October 2023, publicly set out their view that a ‘fraction of a share is not a share and therefore cannot be held in ISAs’.
The policy reason behind HMRC’s interpretation is not obvious. A key benefit of fractional shares is that they make it more affordable for taxpayers to invest in companies where the price per share may be very high (which is particularly an issue in respect of some US companies). Following public pressure, the previous Conservative government announced at the Autumn Statement in November 2023 that it intended to ‘permit certain fractional shares contracts as eligible ISA investments’ and would engage with stakeholders on the implementation of new legislation. However, no timescale was attached to this commitment and, although it was initially hoped that any changes would be introduced with effect from the start of the 2024/25 tax year, it was later confirmed at the Spring Budget in March 2024 that legislation would not be introduced before the end of this summer (notwithstanding that any actual amendments to the current legislation are expected to be relatively minor).
The subsequent General Election has cast further uncertainty on this issue. Although there have been some recent press reports suggesting that Labour would support the previous proposals on fractional shares, there has been no official policy announcement and the position may not be confirmed until the Autumn Budget.
In any case, it is important to flag that any changes to legislation on fractional shares are unlikely to be made retrospective. Given HMRC’s interpretation of the current legislation, therefore, it would still be expected to make assessments for earlier periods and in practice HMRC is likely to pursue the relevant ISA account manager for any unpaid tax rather than investors. As a matter of law, assessments on ISA account managers would strictly involve paying the full amount of tax and voiding the affected ISAs, meaning that investors would need to be informed that the tax-free wrapper on their ISA has been removed. As an alternative, however, HMRC may offer the ex-statutory ‘simplified voiding’ procedure, which would allow the ISA account manager to pay amounts based on a standard formula and ‘repair’ the affected ISAs so that they are not voided (in which case investors may not even be aware of the issue with their accounts).
The normal four-year rule for discovery assessments would apply, with potentially longer periods if there is deemed to be ‘careless’ or ‘deliberate’ behaviour involved. This means that, depending on the ISA account manager’s business, the amounts payable under either the strict statutory approach or the ‘simplified voiding’ procedure could be material. Late payment interest and potentially tax-geared penalties would also apply. HMRC also have the power to issue notices to withdraw ISA account manager approval in certain circumstances, which could clearly have a catastrophic effect on those businesses. ISA account managers have the ability to appeal any such assessments or notices, and there are very good arguments that HMRC’s interpretation of the current legislation is wrong in law.
