HM Revenue and Customs (HMRC) has reversed its position from last year in allowing fractional shares in individual savings accounts (ISAs).

The move from the UK tax authority now means that investors can hold portions of shares in these tax-free accounts, channelling more money into the stock market.

It comes as the new Labour government prepares to update the law.

What is an ISA?

There are four types of individual savings accounts (ISAs) — cash ISA, stocks and shares ISA, innovative finance ISA and lifetime ISA.

Individuals can save or invest up to £20,000 into an ISA each tax year, split between cash and investments. The main difference between an ISA and any other savings account is that no tax is payable on savings interest, dividends or capital gains, and withdrawals are not subject to income tax.

The tax year runs from 6 April to 5 April.

What is changing and when?

UK-based investment trading apps offer investors the ability to buy fractions of a single share within ISAs. But last year HM Revenue & Customs (HMRC) said that fractional shares did not qualify for tax-free accounts.

However, individuals will now be able to buy expensive stocks of high performing tech companies such as chipmaker Nvidia (NVDA), Apple (AAPL), Amazon (AMZN) and Tesla (TSLA), from just £1, rather than needing hundreds of pounds to purchase a single share.

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HMRC said: “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 change may come into force as early as 30 September, according to draft secondary legislation seen by the Financial Times.

Why is it changing?

There was some debate earlier this year as to whether fractional shares should be allowed in stocks and shares ISAs.

Fractional shares are particularly attractive to younger and less wealthy investors because they allow them to own a small part of a high-value stock. This means they don’t have to fork out hundreds to build a portfolio of big names.

It will also help to channel more savers’ cash into investments, as part of a broader effort by the UK government to boost retirement pots for individuals by opening access to stock markets.

The previous Conservative government said last year that it would introduce legislation to allow fractional shares to be held in ISAs but did not do so before the 4 July general election.

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Last month HMRC confirmed, while consulting with investment platforms, the new Labour government plans to introduce the same legislation.

The decision was welcomed by investment platforms with Viktor Nebehaj, chief executive of Freetrade, saying a “sensible resolution” had been reached.

“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," he said.

Future for small investors

Fractional shares are more popular in the US but they are already sold in the UK on trading platforms like Moneybox and Trading 212.

Analysts and consumer champions have argued that small investors have been left behind compared to larger institutions due to HMRC’s previous stance on fractional shares.

Paul Killik, founder of broker Killik & Co, said that individuals were shut out from some of the world’s most attractive stocks as a result.

Meanwhile Susannah Streeter at Hargreaves Lansdown said: “Fractional share trading allows retail investors the opportunity to benefit from the growth of companies they might have otherwise have been priced out of.”

She suggested that the opportunity may also encourage newcomers to “dip their toe” into investing.

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