A Growing Demand for Fractional Share Trading in the UK
The popularity of fractional share trading has been on the rise in the UK, with many new investors using trading apps to invest in the stock market. Fractional share trading allows investors to buy fractions of expensive shares, giving them access to a more diversified portfolio even with limited funds. However, there is an ongoing debate about whether these fractional shares should be allowed in tax-advantaged stocks and shares Isa accounts.
According to HM Revenue & Customs, fractional shares cannot be held in an Isa, as Isa managers must ensure that the investments they offer are Isa eligible. The current Isa legislation does not explicitly mention fractional shares, as it was drafted long before smartphone apps made trading shares possible. Investment apps that offer fractional share trading within Isas have sought legal opinion on the interpretation of the rules and continue to offer this option to their Isa investors.
The Investing and Saving Alliance (Tisa) has been in discussions with the Treasury and HMRC to find a solution and update the Isa legislation to allow fractional shares. Tisa argues that fractional shares are no different from whole shares in terms of how they are held in nominee accounts, but there is a concern about liquidity. Fractional shares cannot be transferred to another Isa provider, which can be a drawback for investors.
Tisa proposes strengthening the regulatory guardrails for Isa managers to guarantee that they would buy back fractional shares when an investor wants to transfer or withdraw their holding. While this is currently done in practice, having a regulatory obligation would address any perceived risk.
If the clampdown on fractional shares progresses, investors would be forced to sell down their fractional Isa holdings. Depending on their portfolio’s performance, this may result in a tax liability and possibly fines for late payment. However, given the small sums involved, the tax charges are likely to be minimal for most investors.
Fractional share trading has gained popularity among young investors who can only afford fractions of expensive shares. Many of these investors turn to well-known US tech giants listed on popular trading apps. There is a concern that penalizing investors for being able to afford only fractional shares within their Isas could deter the next generation of investors and push them toward riskier, unregulated products like cryptocurrencies.
The issue lies in the perception that Isas are only for those who can reach the annual limit of £20,000. However, investing should be accessible to everyone, regardless of the amount they can afford. The hope is that the Isa legislation can be updated to accommodate fractional share trading and ensure a fair and inclusive environment for investors.
In conclusion, fractional share trading has opened up new opportunities for investors with limited funds to access the stock market. While there is a debate about whether fractional shares should be allowed in Isas, it is important to encourage and support young investors’ engagement in investing. Updating the Isa legislation to accommodate fractional share trading would provide a more inclusive environment for investors and allow them to continue benefiting from the potential growth of the stock market.
