Can You Hold Fractional Shares in an ISA? Here’s What You Need to Know

The Treasury and HMRC have been developing plans to allow investors to include fractional shares in an ISA. Here’s an update on the situation.

ISA investors received good news when HMRC approved the use of fractional shares within the stocks and shares tax wrapper.

Discussions have been ongoing between the Treasury, Financial Conduct Authority, and HMRC since late 2023 to facilitate this, although the process was delayed due to the general election.

It now seems likely that the rules will be updated ahead of the chancellor’s October Budget, with expectations that new regulations could be introduced by the end of September. The government has committed to changing ISA rules to permit certain fractional shares. Meanwhile, they have indicated that neither managers nor investors will face assessments for fractional shares acquired before the rule changes are implemented.

What are fractional shares? Fractional shares have become increasingly popular, especially with the rise of newer trading platforms and apps. These shares allow investors to purchase smaller, more affordable portions of a stock instead of buying a whole share. Returns are proportional to the amount invested.

In the US, where some stocks are particularly expensive, fractional shares have lowered entry barriers for retail investors. They gained further traction as trading apps made buying and selling shares easier via smartphones.

Last year, HMRC highlighted a challenge, stating that ISA regulations didn’t formally cover fractional shares, despite some platforms offering them within the tax wrapper. The Treasury addressed this issue in the 2023 Autumn Statement, with confirmation in the 2024 Spring Budget that work was underway with the FCA and HMRC to resolve it.

Are fractional shares allowed in an ISA? Following the Spring Budget and industry consultations, the reversal of HMRC’s policy seems imminent. Once the new regulations are released, certain fractional shares will be permitted in an ISA. However, any specific limitations won’t be known until then.

In the meantime, some providers allow investors to hold existing fractional shares in an ISA but have paused new purchases within the tax wrapper.

Founded in 2017, Fintuity has fast become one of the only digital Independent Financial Advisers (IFA) in the United Kingdom.  Fintuity offers a wide range of financial advisory services including pensions, protection, investments and mortgage advice. The key difference is that as an exclusively digital service, we can offer significant savings and a service that is direct to you and on demand.