HMRC will allow fractional shares in Isas before the rule change

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The UK tax authority has lifted a ban on investors holding parts of shares in tax-free individual savings accounts, in a move that should help channel more money into shares.

Although many UK-based investment trading apps offer investors the option to buy fractions of a single share in Isas, HM Revenue & Customs said last year that fractional shares do not qualify for tax-free accounts.

But the tax authority reversed its position ahead of an expected change to the law by the UK government. The change could come into effect as early as September 30, according to draft secondary legislation seen by the Financial Times.

HMRC said: “The Government has committed to changing the Isa rules to allow certain fractional shares. Taking a pragmatic approach, we will not make a manager or investor valuation for the fractional shares purchased before these changes are made.”

Fractional shares are particularly attractive to younger, less wealthy investors because they can buy expensive shares such as chipmaker Nvidia and technology companies Apple, Amazon and Tesla from as little as £1, rather than needing hundreds of pounds to buy a single share.

The previous Conservative government said in 2023 it would introduce legislation to allow fractional share holdings in Isas, but failed to do so before the July 4 general election.

Last month, HMRC confirmed, while consulting with investment platforms, that the new Labor government plans to introduce the same legislation.

HMRC’s decision, first reported by Bloomberg, was welcomed by investment platforms. Viktor Nebehaj, chief executive of Freetrade, said a “sensible resolution” had been reached.

“Fractional shares allow investors to build a diversified portfolio and access a wider range of investments,” he added. “We are delighted to have worked closely with the Government and HMRC to reach an outcome that benefits UK retail investors.”

The move should also help channel more savers’ money into investments as part of a wider UK government effort to boost retirement potential for individuals by opening up access to stock markets.

Analysts and consumer champions said retail investors had been left at a disadvantage to institutions because of HMRC’s previous stance on fractional shares.

Paul Killik, founder of broker Killik & Co, said people were locked out of some of the world’s most attractive stocks as a result.

Under current rules, individuals can save or invest up to £20,000 in an ISA each tax year, split between cash and investments. No tax is paid on savings interest, dividends or capital gains, and withdrawals are not subject to income tax.