Fractional shares allowed in ISAs, confirms HMRC

ISA investors have been given a boost after HMRC confirmed that new regulations will allow 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 was then halted by the general election. 

Today (23 October), HMRC said that regulation had been laid before parliament on 14 October to allow "certain fractional interests" to be bought in a stocks and shares ISA, junior ISA and child trust fund (CTF). The rules will take effect from 4 November 2024.

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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.”

This means that in theory the ban on fractional shares has already been lifted, in advance of the 4 November date. Some ISA providers have been offering the investment to customers since HMRC announced that it would allow it.

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 investors 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. For example, a single share in Netflix costs $764, while a share in Apple costs $234.

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.

So, I can hold fractional shares in my ISA?

HMRC has announced that "fractional interests of a whole share" are eligible to be held in a stocks and shares ISA, junior ISA, Lifetime ISA and child trust fund.

Certain conditions must be met, such as:

• The relevant whole share, including shares in an investment trust and shares in a fund, must be a qualifying investment for the purposes of the ISA regulations
• The relevant whole share is either: officially listed on a recognised stock exchange, or admitted to trading on a recognised stock exchange in the UK or the European Economic Area (EEA)
• The whole share is held in your name or the name of your nominee — you cannot delegate below the level of nominee
• The investor has beneficial ownership of the fractional interest
• Transfers or withdrawals of fractional interests are actioned within 30 days

For fractional shares, the general conditions regarding annual general meetings (AGMs) and voting rights do not apply. However, HMRC says that if an investor holds multiple fractional interests amounting to a relevant whole share, then the investor rights relating to a whole share will apply. There is more information in HMRC's guidance.

Should I invest in fractional shares?

Fractional shares can be a useful way to gain access to a company share that might otherwise seem too expensive.

Viktor Nebehaj, chief executive of Freetrade, comments: "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."

However, there can be risks involved. Myron Jobson, senior personal finance analyst at Interactive Investor, tells MoneyWeek: “While fractional shares make it easier for modest investors to access expensive stocks, there’s a significant risk that they might focus too much on trading these small portions rather than concentrating on building a diversified portfolio.

“It is also worth noting that fractional shares are not transferrable, so you may need to sell these should you wish to move providers, which could occur a trading cost."

Another potential downside is that you often have limited voting rights. "Many companies grant voting rights only to holders of whole shares, meaning investors in fractional shares may have little to no say in corporate decisions. This can diminish the influence of smaller investors over the companies in which they are part owners," notes Jobson.