Fractional shares ISA – could there be a sting in the tail?

Just over a year ago, I was wasting my time scrolling through Facebook when I saw an advert for an investment app. If you signed up, you could get £30 free to invest. So I signed up and opened a General Investment account that lets you invest in fractional shares. A few months later I opened a fractional shares ISA in the same app to stash away some extra money.

The ability to buy fractional shares opens up the world of investing to a much larger number of people. Some of the most popular shares are, to put not too fine a point on it, expensive. At the time of writing, a share in Facebook owner Meta costs $327.82. A share in NVIDIA Corp is $468.06. If you want a single slice of Booking Holdings Inc, it’ll set you back $3,071.95.

How a fractional shares ISA works

Fractional shares ISAs often allow you to invest in themed funds and in single company shares. If you choose a single company, you don’t have to buy a whole share. So if a share in your chosen company costs £100, you can often invest as little as £10 to buy 0.1 of a share. You’ll get 0.1 of any dividend.

So far, so good. In theory, you can put up to £20,000 into an ISA each year. If it’s a stocks and shares ISA, you don’t pay tax on dividends, capital gains or withdrawals.

What’s the problem?

The current problem is that HMRC is arguing that fractional shares cannot be held in a tax-free account. According to the Financial Times, HMRC has said: “Our longstanding view is that a fraction of a share cannot be held in an ISA”.

This stance has put the wind up those investment platforms offering a fractional shares ISA. The CEO of the Freetrade app has written to investors asking them to lobby the Treasury on the topic ahead of the November 2023 Autumn Statement. In addition, other investment platforms have urged the Chancellor to clarify whether fractional shares ISAs can retain their tax-free status.

Upcoming bills for your fractional shares ISA?

Some platforms have been offering fractional shares ISAs for years. If HMRC gets its way, account holders will have to sell on any fractional shares they hold. They may also have to pay tax on any gains. It’s possible they’ll also get slapped with late payment penalties. That said, HMRC has said: “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.”

What to do next?

As someone with a fractional shares ISA, I’m going to sit things out until the Autumn Statement. I don’t see the logic in why I have to pay tax on 0.99 of a share, but not on a whole one. Also, the amount I’ve invested in this particular ISA isn’t huge, so any future bills will be small. As we’ve seen, it’s possible my investment platform provider will have to pick up the tab.

Other people may choose different strategies. However, I do hope that the Chancellor agrees that fractional shares ISAs should be exempt from tax. If the government wants to encourage good savings and investment habits, letting people have a fractional shares ISA is a simple and effective way of giving younger and less well-off people a chance to do so.

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