With fractional shares, rather than owning a share in a company, individuals own fractions of one or more shares. This could be useful, where, for example, the price per whole share in a company is prohibitively high, or a whole share would cost more than the £20,000 annual ISA subscription.

The emergence of fractional shares post-dates the ISA regulations. Last October, HMRC issued a definitive answer on the topic of fractional shares in ISAs, by way of its tax-free savings newsletter.

At that time, HMRC said, a fraction of a share is not a share and therefore cannot be held in ISAs. ‘Shares’, as referred to in paragraph 7(2)(a) of the ISA Regulations, refers only to whole shares and not parts or derivatives thereof. A fraction of a share does not give the investor the same legal rights as a whole share does. Fractional shares could only qualify for inclusion in ISAs if the ISA Regulations were amended to allow them.

HMRC’s newsletter went on to say that, where fractional shares are an underlying investment in a collective investment scheme or fund (for example an exchange traded fund), they are not subject to the same restrictions.

At that time, HMRC said that any ISA managers who allow fractional shares to be purchased or held within their ISAs as a qualifying investment under Regulation 7(2)(a) should contact HMRC by email at savings.compliance@hmrc.gov.uk.

Then, after considerable public pressure, the previous Government announced, in the November 2023 Autumn Statement, that it intended to “permit certain fractional shares contracts as eligible ISA investments” and would engage with stakeholders on the implementation of new legislation. This commitment was repeated in the March 2024 Spring Budget, with it saying that it was “working as quickly as possible to bring forward legislation by the end of the summer”. This was then put on hold by the general election in July.

However, according to a recent AccountingWEB article, a spokesperson for the new Government has now said: “We have committed to changing the ISA rules to allow certain fractional shares. Taking a pragmatic approach, HMRC will not raise an assessment on managers or investors for fractional shares acquired before these changes are made.”

The department is working with the industry to make clear what the new regulations require of them and the timeframe for implementation. The amended regulations will be publicly available in advance of coming into force, to give ISA managers and investors time to assimilate the new legislation into their processes.

In other ISA news, the Financial Times has reported that plans for the new UK ISA have been shelved. At the time of writing, this has not been confirmed by HMRC, which maintains that the option is still on the table, so, we may have to wait until the 30 October Autumn Statement to find out more.

Please look out for information on Techlink on any developments regarding the above.

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