Fractional shares and ISAs

Alex Campbell

October 27, 2023

Alex Campbell

Our mission is to get everyone investing. Fractional shares help us on that mission.

Fractional shares allow retail investors to start building a diversified portfolio with less. They greatly simplify the investment process and make it more accessible for anyone to get exposure to the most powerful source of wealth creation in the world: companies. 

Why is this a problem?

HMRC stated recently that they believe that the current ISA Regulations do not permit fractional shares. We believe that this is wrong and is not a good outcome for our customers and the retail investment industry as a whole in the UK. 

Until recently, HMRC has not made a clear public statement that they interpret the rules as excluding fractional shares from ISA eligibility. 

We believe that fractional shares offer investors the same benefits and protections as whole shares. What’s more, they support customers in building a diversified portfolio from an earlier stage in their investment journey. 

There’s a lot more technical detail to this argument. If you’re interested, we would recommend you read this analysis done by Dan Neidle. He was previously Head of Tax Law at Clifford Chance and now runs a not-for-profit called Tax Policy Associates, that seeks to educate the public about the UK tax system. 

What is Freetrade doing?

We have explained to HMRC that we disagree with their interpretation of the ISA Regulations. We understand a number of other investment platforms are doing the same. We are continuing to engage with HMRC, the FCA, and the Government about resolving this matter. 

We are also asking the Government to clarify the ISA Regulations to make it clearer that fractional shares are a qualifying investment, and to announce this as part of the Autumn Statement in November 2023.

Our primary aim is to identify an outcome that provides clarity and certainty to our customers and potentially millions of other retail investors who may be impacted. 

At the start of October, 2023, we shared a letter with our customers, asking them to submit their view to the Treasury ahead of the Autumn Statement. 

We’re also implementing some changes to our app that will make it easier for ISA investors to only buy whole shares, just like we offer for UK shares at the moment. 

We are taking this latter step because we feel that it’s fair to give our customers the choice about whether they want to buy and hold fractional shares in their ISA while this matter is ongoing. This in no way reflects our view on the merits of our argument, and we are continuing to advocate for a clarification of the rules that would put the matter to rest. 

What can I do?

Write to your local MP and politicians

We’ve reached out to customers and asked them to lend their support by writing to the Treasury ahead of the Autumn Statement (November 2023). 

If you submitted a letter to the Treasury, thank you.

You can also write to your local MP to raise this issue. Regardless of their party affiliation, your MP is there to hear about issues that impact your daily lives, and they’re supposed to advocate for changes that could benefit their constituents. 

The UK Parliament publishes information about how you can go about contacting your local MP if you’re unsure. 

If you want to take action 

At present there is no need for you to do anything to sell or remove fractional shares from your ISA. 

However, if you’re a current ISA customer and you want to take some proactive steps to remove fractional components of shareholdings from your account, there are a few things you can do right now:

When buying: You can use limit orders to only buy whole shares. This enables you to set a share price at which you would like to buy shares and will be “triggered” when the target price is reached. It does not result in fractional positions. 

When selling: You can specify the amount after the decimal point that you would like to sell. 

You can do this to specifically sell down fractional components of a shareholding. 

What happens next?

Our customers’ best interests are our first and main priority in this matter. When we are in a position to provide updates, we will do so to all of our ISA customers directly. 

There is nothing more that you need to do at this stage.

We are continuing to discuss this matter with HMRC with a view to finding a resolution that protects customers. We should note, as HMRC has publicly stated, "[w]hen an ISA manager allows investment in non-qualifying assets, [HMRC] would seek to recover any tax loss from the Isa manager [i.e. Freetrade] rather than the investor where possible.” 

There is a possibility that HMRC could insist that we stop offering fractional shares in ISAs, at least until any clarification is made to the law. If this happens, we would communicate this decision with plenty of warning to enable you to choose how you might remove these fractions from your ISA (either selling fractions down to cash or transferring to your GIA).

While fractional shares can benefit investors of all sizes, we believe that preventing them from being held in ISAs creates barriers to entry for those with more modest amounts to invest. This runs counter to our mission and our beliefs as a company.

We feel it’s important that we continue to advocate for the real benefits that fractional shares offer to ordinary investors. It is very clear to us that fractional shares make investing more accessible and make it easier for investors to be able to effectively build a diversified portfolio. 

The views expressed above are those of community members and do not reflect the views of Freetrade. It is not investment advice and we always encourage you to do your own research.

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