Trading platforms have started letting investors put fractional shares in their ISA again ahead of an expected change in HMRC rules.
The taxman had been working with the Treasury and the Financial Conduct Authority (FCA) on changes to ISA rules since the end of 2023 amid the rising popularity of trading apps that let users purchase fractional shares through the tax wrapper. Current ISA regulations didn’t specifically permit portions of shares to be used in a stocks and shares ISA, raising fears that investors may have to sell their fractional share holdings from an ISA.
But the rules are now expected to be officially amended, possibly even before the Autumn Budget, after investors and trading apps were last month given the go ahead to continue backing fractional shares and receiving tax-free returns through an ISA with no penalties.
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An HMRC spokesperson 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.”
What are fractional shares?
A fractional share lets an investor buy a portion of a stock rather than paying the full share price. They have become more popular since the emergence of trading apps that let you buy and sell shares from your smartphone.
It provides a cheaper way to start investing and build a portfolio, which can appeal to younger investors with less money to put away - or even those nervous about committing too much. This means any returns are equivalent to how much they have invested. They are popular in the US where share prices are particularly high and brokers argue that it lowers the barriers to entry for retail investors.
Not all investment platforms offer fractional shares and you will mainly find them on newer trading apps. Some platforms may let you buy and sell fractional shares but only in a general investment account.
Here are the financial apps and investment platforms that will let you put fractional shares in an ISA:
Freetrade
Stock trading app Freetrade previously let users buy US fractional shares through its self-invested personal pension, general investment account and ISA. It had stopped allowing new investment into fractional shares through an ISA while the rules were clarified.
Anyone with fractional shares in an ISA could keep them in their portfolio but were unable to add new ones. The trading app announced this week that users can now purchase US shares through its Freetrade ISA again.
Etoro
Investors on eToro can put money into fractional shares through its general investment account but it is currently not possible through an ISA.
Dan Moczulski, managing director of eToro UK, told MoneyWeek: "Whilst we offer fractional shares on the eToro platform, we currently do not offer fractional shares as part of our ISA solution.
"Nonetheless, we are strong advocates of fractional shares and allowing them in ISAs is a sensible move from HMRC and the new Labour government. This will reduce barriers to investing for Brits, as more savers will be encouraged to put their cash to work if they can easily diversify their portfolios with smaller amounts of money without having to pay tax.
"Crucially, fractional shares in ISAs also give people the freedom to invest and withdraw the exact amount of money that they want, rather than being forced to take out smaller or larger amounts, just because their ISA holdings need to be made up of whole shares."
Trading 212
Trading212 lets users buy fractional shares and exchange traded funds through its ISA. It was so confident that HMRC would allow them that it didn’t even stop new investment while changes were being considered.
InvestEngine
InvestEngine lets users build a portfolio of exchange traded funds. This can be done through its ISA by purchasing fractional shares.
Moneybox
Moneybox has also consistently let users include fractional US shares in its stocks and shares ISA, alongside funds and exchange traded funds. Brian Byrnes, head of personal finance at Moneybox, said: “We, like other platforms, had interpreted that the original ISA legislative wording, which was introduced prior to fractionals existing, allowed for fractional shares within the ISA wrapper.
“We have been consistent with our offering and messaging to customers while awaiting clarity from HMRC. “
Byrnes welcomed HMRC officially changing the regulations, adding: “It is widely recognised that far more people could be benefiting from investing than are currently doing so. If the past few years have taught us anything, it's that as a society we need to take financial resilience more seriously and, the truth is, financial resilience is mostly about enabling more people to build wealth throughout their lives.
“Thankfully, the environment is slowly changing, and clearing up any perceived ambiguity around fractional shares will allow more people to build diversified investing portfolios from much lower starting amounts. More progress on the Advice Guidance Boundary Review and pensions dashboards will also be welcome.”
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