iE team, what is the thoughts on this.news?
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Yep , need clarification about this .
Hi! I’ve forwarded your question to the relevant team to investigate and we’ll post updates here once we get any info
I saw this too, quite worrying. but I just can’t see HMRC clamping down on all investors that bought fractional shares, feel it’s more likely that either they will say oh no it’s all ok and update the legislation or fine the platforms.
Hi @nven200
Thanks for sharing this with the community. At the moment, we believe this story is nothing more than a headline.
Fractional share investing is used by many investment platforms globally and we believe it would be a backward (and unlikely) step for HMRC or wider regulators to limit the provision of these.
Fractional shares make investing more efficient and accessible to investors at all levels, and in an industry geared towards helping more people secure their financial futures, innovations such as these should be encouraged, not constrained.
As part of our duty, we’re in regular communications with the regulator and HMRC. Our ISA service was reviewed by HMRC, as is common practice, and this issue was not highlighted — supporting our belief that fractional shares will continue to be available in UK investors’ ISA portfolios for the long run.
We firmly believe that innovations such as fractional investing are the future and we will continue to support this belief on behalf of our clients. If you have any further questions, please do not hesitate to get in touch via support@investengine.com. We’ll share any updates as and when we hear more but we don’t anticipate your ISA to be affected in the near future, if at all.
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Here’s the Freetrade response. Part of both arguments seems to be that it is simply natural justice to allow fractional shares, but that is not how the law operates, either it is legal or it is not. Might cost some considerable legal fees to find out which it is if HMRC decides to challenge the situation.
Alex Campbell Head of Communications (at Freetrade)
Hi both,
Just to provide a bit of context on our position that may or may not be accurately reflected in that report.
We strongly believe fractional shares make investing more accessible for savers, especially those just getting started. It aligns directly with our mission to Get Everyone Investing. Fractional shares offer investors materially the same benefits and protections that they receive when investing in whole shares. For this reason we began offering fractional shares in our ISA product in 2020.
We believe Fractionals are permitted by the rules and we have received well reasoned legal advice that supports our position. Other providers also offer fractional shares in their ISAs and have received similar supportive legal advice. We have been in discussion with HMRC on this matter for some time. Nothing raised by HMRC so far changes our informed position.
We are committed to resolving this directly HMRC as required. We want to reassure customers that Freetrade would be responsible for settling any tax liabilities due on fractional shares in our customers’ ISAs. However, we will resist such an action by HMRC, as we believe that collecting tax on these amounts would be unfair on us and our customers, and unsupported by the ISA rules and wider policy considerations.
We feel it’s important that we robustly defend our interpretation of the rules because of the real benefits that fractional shares offer 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. While fractions benefit investors of all sizes, banning them from ISAs would create barriers to entry for those investors with more modest amounts. This runs counter to our mission and our beliefs as a company. We are committed to protecting the interests of our customers and everyday investors at large in fighting for and securing a positive outcome.
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Regulation is not keeping pace with market changes. The spirit of the HMRC guidelines is not to disadvantage future market innovations. The reasoning is complex and technical but boils down to how the whole share is legally apportioned onwards to the underlying holder (you). The broker or market marker purchases the whole share. The contractual arrangement by which it is divided up and legally distributed to the end user looks and feels like a method incompatible with current HMRC ISA guidance. Hence fractions are technically not allowed in ISAs as of today with the wording the way it is. This is surely not what HMRC intended so hopefully logic and sense will prevail. ISA guidance is complicated enough without this possible tweak. Let’s not make it harder and disadvantage the retail investors in the process. Over to you Mr HMRC.
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@DeeFunds Thanks for the comprehensive reply, and look forward to future updates.
There is a good article by David Stevenson on CityWire on this news as well, https://citywire.com/funds-insider/news/david-stevenson-fractional-share-row-shows-isa-regulators-are-out-of-touch/a2419806
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I’m glad I could help.
This article was a great read, thank you for sharing! David Stevenson has an interesting viewpoint on this and we hope, in the end, any decision made ultimately benefits our investors.
If the decision made ultimately means I (and other Investengine clients) have to sell fractional ETF holdings from ISAs and expose them to CGT charges – I’m not seeing that as a benefit.
It shouldn’t come to that. But since I think that article is wrong and the issue is not just US shares it is any fractional share in an ISA as the contractual mechanism by which it made it’s way into my ISA is technically non-compliant with ISA rules as they stand right now – it could.
I appreciate that there isn’t much Freetrade and IE can say/do about this but as things stand, HMRC has written to providers stating that current legislation means that fractional shares cannot be held in an Isa.
Their stance seems pretty unambiguous. A spokesman for HMRC said: ‘Fractional shares cannot be held in an Isa. Isa managers must make sure the investments they offer are Isa eligible.’
The only permanent solution would be for parliament to pass legislation to amend the ISA rules making it clear that the underlying legal structure of ‘fractional shares’ is ISA compatible.
Until then, it’s all a bit uncertain. What this row is going to do is freeze this corner of the retail investing space as irrespective of the talk, no one’s going to innovate with fractional investments until there is clarity on this issue.
What is the extent of the issue? Let’s say I own 2.5 shares in an ETF in an ISA. Are the 2 whole shares I own ‘fine’ and it’s the half share that is not allowed - or is the whole position at risk?
What if I’ve built a position over time by buying say 0.5 shares at a time, but now own a whole number of shares - is that ok?
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As I understand it, all of our investments within InvestEngine are fractional shares, irrespective of how round (or not) the number is or whether you buy shares as whole numbers or fractions.
Hopefully IE will correct me if my understanding is wrong.
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I believe IE only has one answer to this- HMRC guidelines are outdated. But unfortunately, the law does not work that way.
While my trust is already broken on the platform due to unsettled trades that go on for months, without giving the customer the option to cancel the trade due to the delay in settlement.
Hopefully, IE will keep its customers updated proactively. This could be the last nail after unsettled trades to move away from IE…
I don’t really see the problem here for IE. The clause that permits ucits etfs in the regulations does not require that the units are exchange traded, which is where, I think, that the synthetic fractional company shares are inadmissible.
Hi all,
Thanks for your continued discussion on this topic, it’s one that we are closely monitoring with the relevant regulators and we’ll continue to be proactive on the issue and with our community as and when there is further information.
As it stands, our position remains unchanged — we see fractional investing as part of the future, and believe HMRC and the regulators will ultimately support it. This view is also supported by other fractional investment providers and our tax advisors, who provided the below thoughts:
- HMRC are unlikely to be reactive regarding fractional shares article
- There’s a strong possibility that the HMRC quote came from someone with no decision making power
- If HMRC do react, likely to be via an ISA Bulletin clarifying rules (to which we can respond)
- If HMRC take a hard line, we can challenge that directly to HMRC or legally
Regarding any specific questions raised above, as we’ve had no formal notification from HMRC on the comments in the article, it would be purely speculation at this time for us to comment, however should anything change we will be sure to respond appropriately.
For now we’re confident that our philosophy and approach in helping you with your investing is the right one, and we’ll continue to develop InvestEngine to make this even better for you.
Thank you for the update on this - obviously I find it slightly unsettling and although I don’t hold fractional shares in an isa on this platform I do on another- so any clarification or news is much appreciated
Has there been any update from HMRC on this?
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@Paul_M/@DeeFunds, has there been any update on this from HMRC? (It’s been a couple of months now).
I’ve only just discovered this today and seems crazy that HMRC might actually be that petulant. Could anyone clarify, for my layman benefit, whether holdings of ETFs are legally considered shares or units of funds? And would that make a difference for this platform vs FreeTrade if it’s HMRC’s contention that shares of companies must be ordinary shares?
Hi Dennis, We have not received any update from HMRC so far so our position remains unchanged
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