ISA investors have been given a boost after HMRC gave the go-ahead for fractional shares to be used in the stocks and shares tax wrapper.
Officials from the Treasury, Financial Conduct Authority and HMRC had been working on plans to let investors put fractional shares in their ISA since the end of 2023 but progress has been halted by the general election.
It now looks like rules will be changed even before the chancellor's October Budget and there are reports that new regulations could be put forward by the end of September.
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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?
Fractional shares have become popular among influencers and are used on newer trading platforms and apps such as Freetrade, eToro and InvestEngine. They let investors buy a more affordable portion of a stock rather than the whole thing.
Fractional shares break up a stock to let investor buy a portion of one rather than paying the full share price.
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.
Fractional shares have become more popular since the emergence of trading apps that let you buy and sell shares from your smartphone.
This caused an issue with HMRC last year as it warned that ISA regulations don’t cover fractional shares despite some investment platforms letting users put them in the tax wrapper. The Treasury announced changes to this policy in the 2023 Autumn Statement and later confirmed in the 2024 Spring Budget document that it was working on this with the Financial Conduct Authority (FCA) and HMRC.
Are fractional shares allowed in an ISA?
HMRC’s policy is set to finally be reversed following the Spring Budget and consultation with the sector.
This will mean certain fractional shares can be held in an ISA but we won't know any restrictions until the new regulations are released.
In the meantime, some providers are letting investors keep their fractional shares in an ISA but have stopped new purchases through the tax wrapper.
Viktor Nebehaj, chief executive of Freetrade, said: "We've stood firm in our support of retail investors to ensure that we reached a sensible resolution on this issue.
"Fractional shares enable investors to build a diversified portfolio and access a wider range of investments. We have always maintained that fractional shares meet the criteria to qualify to be held in an ISA. We're pleased to have worked closely with government and HMRC to reach an outcome that benefits retail investors in the UK."
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