HMRC want to tax your ISA

HMRC have written to some of the most popular retail investing platforms to tell them that current legislation means fractional shares are not ok to hold in an ISA, and this is a big deal for anyone who holds fractional shares in an ISA.

HMRC want to change your stocks and shares ISA

So I decided to dig in and see what I could find and I have quickly put this blog together to try to work out what it means for normal people like you and I who, well, just want to invest and try to look after our futures. You know… the way the government have been asking us to all this time.

Why are fractional shares are important to retail investors?

A lot of good companies that people want to invest in are expensive.

Fractional shares allow retail investors to spread their money across a lot of shares to create a healthy diversity.

All your money doesn’t have to go in one place and suffer the risks of that. For example, a share in Apple will cost you about $180, give or take.

That means that unless you have $180 you can’t buy a full share of Apple. Microsoft sits at around $330

Fractional shares mean I can buy a little bit of Apple and Microsoft even when I don’t have enough for a whole share. Some of the modern apps like Trading 212 or InvestEngine will let you invest as little as £1 in a stocks and shares ISA. 

That’s great for anyone who wants to start investing and great for anyone who wants to continue drip-feeding funds into a stocks and shares ISA.

The advent of fractional shares has lowered the barrier for entry so low that just about anyone can start to invest in a tax free manner. 

Are tax free ISAs coming to an end?

All gains in an ISA, whether it’s stocks and shares or cash, are free from any taxation and of course, currently you can invest up to £20,000 a year (£9,000 for kids).

All gains of all descriptions are free from tax, so over the years you have the opportunity to build up a really nice pot… and fractional shares give you a lot of choices as to how to put that pot together. Every penny can be working for you if you want it to.

So why is HMRC taking aim at fractional shares?

Well, HMRC don’t reckon that fractional shares are allowed in an ISA.

It’s not that HMRC have an issue with fractional shares as a concept, it’s just they don’ think they are a valid asset to hold in an ISA specifically.

No trouble holding them in a general investing account where all the usual tax rules apply.

HM Revenue & Customs recently had a meeting with some of the industry’s leading lights and government officials, at which point they reiterated their stance that this type of investment could not be held within an ISA despite the protestation of various platforms disputing this particular interpretation.

Their problem goes back to a definition set out in 1998 of what can go in an ISA and to be honest, I’m not getting into that now, because I’m more interested in what it means for you and I if they are right, rather than whether they are or not, if you see what I mean. 

I’ll leave a link if you want to go and see the legislation for yourself – but I think mostly their trouble is that in some cases at least, a fractional share isn’t really a share from a company but rather an agreement between you and your investment platform to hold a portion of a portion… a derivative of a sort and thus doesn’t belong in an ISA… anyway….

What happens if HMRC get fractional shares banned from ISAs?

The short story here is that if HRMC get their way and it is decided that fractional shares can’t be in an ISA then it could force investors to sell out of any fractional positions, and then of course there would be a tax bill to pay, since these fractional shares shouldn’t have been held in a tax free wrapper in the first place.

That would be ugly to say the least, and potentially disastrous to anyone who has been planning their investing for any length of time. There would also be a ton of unknowns which I can only speculate on – would you be forced to sell the fractions? Could you consolidate into something else? Move to a cash ISA? 

It’s a very confusing time for investors – apart from anything else, the goalposts feel like they are being shifted for everyday investors like you and I.

Worlds collide

On one side of the coin HMRC are saying it’s not ok, on the other you’ve got three main groups as I see it. People like Jeremy Hunt – seeking ways to simplify ISAs and get more people investing. There are the platforms themselves who are offering these products and have done for years and of course the FCA who authorise and regulate these companies sitting alongside them. 

And that’s a weird one.

What does the regulator have to say about HMRC and fractional shares?

I can tell you having dealt with the FCA and their representatives before they are a tough nut to crack and I have to say that if there is suddenly real heart-ache for investors here because of fractional shares being offered by these platforms, why have the FCA given their approval to so many platforms for so long. If the FCA haven’t had a problem with fractional shares in an ISA but HMRC do, what are the public meant to think about what’s going on here? The FCA being the authority for all things financial product in the UK have, for so long now given their blessing and said ok to the idea of offering fractional shares being held in an ISA. 

As a consumer I look for proper regulation on anything because I want to know I’m being looked after, so I have to say seeing HMRC and the FCA on apparently opposite sides here is concerning.

Why is HMRC and fractional shares in the news now?

So. Why now? Why wait for so long before HMRC want to go public with this. 

Maybe it’s the rise of more and more investing apps.

Each new player on the market seems to offer fractional shares and maybe it’s just that now is the time to adapt the rules or get a discussion moving to modernize the legislation. I don’t know.

It’s worth noting the old guard and some of the more established providers like Vanguard or Hargreaves Lansdowne don’t offer fractional shares. I wonder have they known something all along.

Who will pay the bill if HMRC get their way on fractional shares?

In any case, if HRMC get their way, there will be a tax bill to pay.

So where would that leave you and I?

It’s interesting to see this quote from HMRC…

“Our longstanding view is that a fraction of a share cannot be held in an ISA. When an ISA manager allows investment in non-qualifying assets, we would seek to recover any tax loss from the ISA manager rather than the investor where possible”


So it looks like it’s the platforms that could potentially have a fairly hefty tax bill to pay rather than the man on the street if this one goes the distance.

I can’t imagine the top dogs of pretty much every modern investing platform are going to love that. I suppose the knock on effects could range from fractional shares being pulled from the platforms or even.

Is my platform going to make changes because of HMRC’s interest in fractional shares?

There is even a risk here that platforms will introduce more ways to recover that bill from their customers – maybe in terms of more fees… some will just pack up and go away, or find they don’t have the funds to pay and simply go under. Again this is all speculation and I don’t know what happens next.

It all leads to a lot of uncertainty and if there is one thing investors don’t like it’s uncertainty.

If the government wants us all to invest and to try to look after our futures then my opinion is this needs to be sorted out one way or another pretty quickly so we can all be confident we are putting our money into something reliable and worthwhile.

A bit like what we have been doing all along.

We could all do with a little less moving of the goalposts.

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