Fractional ETF shares in a S&S ISA?

hewhohuntselves

Hi. Apologies if this has been covered before, but are fractional shares in ETFs allowed - by HMRC - in a S&S ISA?  I know the government plans to allow fractional shares to be held at some point, but is the current issue that HMRC has with them limited to company shares only?  Thank you.

masonic

The forthcoming legislation will address the issue, so it isn't worth worrying about. HMRC's position wasn't really very clear, but ostensibly ETFs and investment trusts were also in the firing line.

DavidT67

https://www.fca.org.uk/firms/fractional-shares

"HM Revenue & Customs (HMRC) currently does not consider that fractional shares are eligible for ISAs. This is a longstanding position which it has recently confirmed in guidance"

Fractional shares means any exchange traded instrument, that includes ETFs and Investment Trusts.

hewhohuntselves

Thank you both.  Do we have any idea if the position will be resolved before the end of the current tax year?

Hoenir

Is there a particular ETF which is on your radar. 

hewhohuntselves

I want to use a couple of global funds, but it’s more about platform fees.

eskbanker

hewhohuntselves said:

Thank you both.  Do we have any idea if the position will be resolved before the end of the current tax year?

Doesn't seem likely - there are a number of changes to ISAs that were announced as starting from the beginning of the new tax year, but the fractional shares one is vaguer and more aspirational:

1.3 ISA reform

The government announced a package of ISA reforms and will make these changes to ISAs from 6 April 2024:

1. Increase the age for opening Cash ISAs from 16 to 18 and over. This is consistent with the age requirement already in place for opening Stocks and Shares, Innovative Finance and Lifetime ISAs.

2. Allow subscriptions to multiple ISAs of the same type, with the exception of Lifetime ISA, within the tax year, removing the limit on subscribing to one ISA of each type per year. All subscriptions must remain within the overall ISA limit of £20,000.

3. Remove the requirement for an investor to make a fresh ISA application where an existing ISA account has received no subscription in the previous tax year.

4. Allow Long-Term Asset Funds to be permitted investments in an Innovative Finance ISA, which does not require access to funds within 30 days.

5. Allow open-ended property funds with extended notice periods to be permitted investments in an Innovative Finance ISA. 

6. Allow partial transfers of current year ISA subscriptions between ISA managers.

The government also plans to hold discussions with industry on allowing certain fractions of shares to become permitted ISA investments.

https://www.gov.uk/government/publications/tax-free-savings-newsletter-10/tax-free-savings-newsletter-10-november-2023

masonic

hewhohuntselves said:

I want to use a couple of global funds, but it’s more about platform fees.

So you are saying that you want to use InvestEngine?

I don't see it as a particular risk now, whereas I was concerned since before HMRC started opining on the subject. It's necessary to go through a consultation process. Investment companies have been offering fractional shares for years, and may not all be adhering to the same standards. There needs to be an understanding of what is currently happening in practice and a view on what is acceptable and what is not. The link posted by DavidT67 detailed some of these considerations. But I don't see HMRC now throwing its weight around voiding people's ISAs.

Even after the change there will be considerations such as how to perform an in specie transfer, how to deal with a corporate action where co-owners of a share wish to exercise different options, or uncharted territory such as what happens if a fractional share trading platform fails.

hewhohuntselves

masonic said:

hewhohuntselves said:

I want to use a couple of global funds, but it’s more about platform fees.

So you are saying that you want to use InvestEngine?

I don't see it as a particular risk now, whereas I was concerned since before HMRC started opining on the subject. It's necessary to go through a consultation process. Investment companies have been offering fractional shares for years, and may not all be adhering to the same standards. There needs to be an understanding of what is currently happening in practice and a view on what is acceptable and what is not. The link posted by DavidT67 detailed some of these considerations. But I don't see HMRC now throwing its weight around voiding people's ISAs.

Even after the change there will be considerations such as how to perform an in specie transfer, how to deal with a corporate action where co-owners of a share wish to exercise different options, or uncharted territory such as what happens if a fractional share trading platform fails.

You’re spot on, it’s InvestEngine.  It also lets you create pots within the same ISA which is helpful for keeping my daughter’s investments separate from mine.

I think you are right to say it is low risk, although you could think of a scenario whereby existing - ostensibly impermissible - holdings are deemed to have been held in a general investment account even if future contributions are considered to be ISA eligible.  

masonic

hewhohuntselves said:

masonic said:

hewhohuntselves said:

I want to use a couple of global funds, but it’s more about platform fees.

So you are saying that you want to use InvestEngine?

I don't see it as a particular risk now, whereas I was concerned since before HMRC started opining on the subject. It's necessary to go through a consultation process. Investment companies have been offering fractional shares for years, and may not all be adhering to the same standards. There needs to be an understanding of what is currently happening in practice and a view on what is acceptable and what is not. The link posted by DavidT67 detailed some of these considerations. But I don't see HMRC now throwing its weight around voiding people's ISAs.

Even after the change there will be considerations such as how to perform an in specie transfer, how to deal with a corporate action where co-owners of a share wish to exercise different options, or uncharted territory such as what happens if a fractional share trading platform fails.

You’re spot on, it’s InvestEngine.  It also lets you create pots within the same ISA which is helpful for keeping my daughter’s investments separate from mine.

I think you are right to say it is low risk, although you could think of a scenario whereby existing - ostensibly impermissible - holdings are deemed to have been held in a general investment account even if future contributions are considered to be ISA eligible.  

HMRC gets annual returns from ISA managers detailing contributions. It does not receive information about which investments were bought with the contributions and when. The problem is for the ISA managers, as without the change in legislation, they could be prevented from offering fractional share trading and/or required to liquidate their customers portfolios. The question would then become whether capital gains and dividend income should be treated as taxable. All of this has become very unlikely, with the understanding that change is afoot. At the moment HMRC can barely keep up with policing the annual allowance and people opening invalid combinations of ISAs. Opening this can of worms would be much more complex and far-reaching. A heavy-handed approach before the change would likely drive InvestEngine and others out of business, then who would analyse the trading history of thousands of customers to figure out what's what? After the change, HMRC wouldn't ordinarily know what was held in the portfolio in the past, so on what basis would they open an investigation into a consumer's affairs?

To be clear, the risk isn't zero, but the problems created by taking action would far outweigh the benefits, and the ongoing consultation is likely to reinforce this point. It would also certainly not be a good PR move following the statement of the government's position on the matter.

aroominyork

Are fractional shares allowed in SIPPs and trading accounts, and if so why have ISAs been treated differently?