HMRC announces major shake up in the treatment of tax free ISAs

HMRC has decided against a ban on tax free individual savings accounts (ISAs) from holding less than a full share of a stock ahead of an expected rule change by the government.

The move is expected to encourage investment in shares particularly among young adults, who are keen to buy a stake in high performing tech companies but might not have the funds to buy expensive individual shares.

Historically, HM Revenue and Customs ruled that fractional shares could not be held in an ISA with the result that the owners could not benefit from tax free gains on these investments.

HMRC has now reversed its position ahead of an expected change to the law which may come into force as early as 30 September, according to draft legislation seen by the Financial Times.

In 2023 the previous Conservative government said it would introduce legislation to allow fractional shares to be held in ISAs but did not manage to do so before the general election. Last month HMRC confirmed the new Labour government plans to introduce the same legislation.

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

He said: “Fractional shares enable investors to build a diversified portfolio and access a wider range of investments. We’re pleased to have worked closely with government and HMRC to reach an outcome that benefits retail investors in the UK.”