Fractional shares are portions of a whole share that can be bought and sold on the stock market. They allow investors to own a part of a company without paying the full price of a single share. For example, if a share of Apple costs $150, an investor can buy a fractional share of 0.1 for $15.
Fractional shares are popular among retail investors, especially those who are new to the stock market or have limited funds. They enable them to diversify their portfolio and invest in companies that they otherwise could not afford. They also allow them to benefit from dividends, capital gains, and voting rights proportional to their ownership.
How do fractional shares work in an Isa?
An Isa is an individual savings account that offers tax benefits for UK savers. There are different types of Isas, such as cash Isa, stocks and shares Isa, lifetime Isa, and innovative finance Isa. Each type has its own rules and limits on how much money can be invested each year.
A stocks and shares Isa allows investors to buy and sell shares, funds, bonds, and other securities without paying any income tax or capital gains tax on their returns. However, there is a catch: according to HM Revenue & Customs (HMRC), fractional shares cannot be held in an Isa.
This means that investors who use online platforms that offer fractional share trading, such as Freetrade, Trading 212, or InvestEngine, may be violating the tax rules and face potential penalties. These platforms have been growing in popularity in recent years, attracting millions of customers who want to access the global stock market with low fees and minimum deposits.
Why are fractional shares not allowed in an Isa?
The reason why fractional shares are not allowed in an Isa is that they do not meet the definition of a qualifying investment under the current legislation. The law states that only whole shares can be held in an Isa, and that fractional shares are not recognised as legal entities for tax purposes.
This rule dates back to 1998, when the Isa scheme was introduced by the government. At that time, fractional share trading was not widely available or popular among investors. Therefore, the law did not anticipate or accommodate this innovation.
However, times have changed and technology has advanced. Fractional share trading is now a common feature of many online platforms that cater to the needs and preferences of modern investors. Therefore, some experts argue that the law should be updated to reflect this reality and allow fractional shares in an Isa.
What are the benefits of allowing fractional shares in an Isa?
Allowing fractional shares in an Isa would have several benefits for investors and the economy. Some of these benefits are:
- It would make investing more accessible and affordable for everyone, regardless of their income or wealth level.
- It would enable investors to build a balanced and diversified portfolio with less money and risk.
- It would increase the participation and engagement of retail investors in the stock market, which could boost liquidity and efficiency.
- It would encourage long-term saving and investing habits among younger generations, which could improve their financial literacy and security.
- It would align with the government’s mission to promote financial inclusion and innovation in the UK.
What are the challenges of allowing fractional shares in an Isa?
Allowing fractional shares in an Isa would also pose some challenges for regulators and platforms. Some of these challenges are:
- It would require a change in the legislation and guidance from HMRC, which could take time and resources.
- It would create some technical and operational difficulties for platforms that offer fractional share trading, such as ensuring compliance, accuracy, transparency, and security.
- It would raise some legal and ethical issues for platforms that use synthetic or derivative methods to create fractional shares, such as ensuring ownership, custody, and protection of investors’ rights and interests.
- It would increase the complexity and uncertainty for investors who use fractional share trading, such as understanding the costs, risks, benefits, and implications of their decisions.
