Fractional shares now allowed in ISAs as the UK ISA cancelled

HMRC and the Government both make about-turns on ISAs as two potential changes to the rules around ISAs have come to light this week, the changes are related to the treatment of fractional shares and the UK ISA.

Fractional Shares Now ISA Eligible

HMRC has decided to end a ban on the inclusion of fractional share holdings within ISAs. Whereas HMRC had previously viewed fractional shares as derivatives akin to CFDs, which it considers ineligible for ISAs.

However, the taxman has now changed their mind, ahead of possible legislation from the government, which it’s thought will allow fractional shares to be held and traded within the ISA structure.

HMRC was quoted as saying that:

“The government has committed to changing the Isa rules to allow certain fractional shares. Taking a pragmatic approach, we will not raise an assessment on managers or investors for fractional shares acquired before these changes are made.”

The previous UK administration had indicated that it would introduce similar legislation. However, the July 4th general election prevented them from doing so.

UK ISA Scrapped

The decision on the inclusion of fractional shares wasn’t the only about-turn this week.

The new Labour government is said, somewhat surprisingly, to be ready to scrap the UK ISA, according to the FT and others.

Labour had previously pledged its support to the UK-focused ISA top-up, as recently as May.

However, those in the retail savings and investment industry won’t be sorry to see it go.

Michael Summersgill the CEO of D2C platform AJ Bell said that:

“The UK ISA was a political gimmick that was doomed to fail in its objective of boosting investment in UK Plc,”

And he added

“The new government deserves huge credit for consigning this ill-conceived idea to the policy dustbin”

The UK ISA was introduced to allow investors access to an additional £5000.00 per annum of ISA allowance, which was to be invested into UK businesses.

The exact details about what investments would and wouldn’t qualify, and how this would be policed had yet to be finalised.

Perhaps the additional administrative issues outweighed any perceived benefits from the scheme.

Whilst these two decisions may have met with industry approval, wealth managers and other investment firms are cautious about what October’s maiden budget could bring.

Chancellor Rachel Reeves has made no secret of the fact that those with the “broadest shoulders” will have to bear a bigger burden under her spending plans.

Sparking fears about changes to CGT and inheritance tax rates and thresholds. Tax relief on pensions, or even the levying of additional taxes on pension income.

Might the chancellor also review the tax-free ISA allowances, or perhaps institute a cap on lifetime contributions or pot sizes?

ISA Industry

ISAs celebrated their 25th anniversary in April this year, and it’s estimated some £750.0 billion are invested in the tax-free wrappers.

With just under two-thirds of that held in cash and a third in stock and shares.

According to data from AJ Bell, the ONS and HMRC, almost one-third of 18-25-year-olds have an ISA.

That figure rises to 39.0% for 25-34-year-olds, and the groups aged between 35-44 and 45-55 years.

ISA ownership jumps to 46% among 55-64 year olds and 50.00% among those aged 65 or over.

Some 1.60 million investors pay in the full £20,000 annual allowance, and they account for 7.0% of all ISA holders.

However, a much bigger proportion of ISA holders, some 47%, invest sums of £2500 per annum, or less, into their ISAs

As of April this year, the average ISA account was estimated to be worth just under £31,000.