What caught my eye this week.
The tussle between HMRC and the fintech share dealing platforms over whether to enable the holding of fractional shares in an ISA may be reaching a climax.
To summarise, these typically app-based brokers enable you to gain exposure to less than a whole share and to hold these in your ISA account.
For instance Amazon shares currently trade at around $132 a pop. With Freetrade, say, you could invest $66 (ignoring FX fees) and get exposure to just half an Amazon share.
Sounds like a win-win, right? Well the taxman doesn’t approve.
From The Financial Times:
HM Revenue & Customs held a meeting with industry figures and Treasury officials last week, during which it maintained that this type of investment could not be held within a tax-free account despite platforms disputing this interpretation of the rules.
Platforms had hoped that chancellor Jeremy Hunt’s desire to simplify “a complex landscape” of Isa products and encourage more people to save and invest would soften HMRC’s position. They have urged the chancellor to clarify his position in next month’s Autumn Statement.
Moneybox, Trading 212, and the aforementioned Freetrade all enable customers to invest in fractional shares in their ISAs.
As far as I’m aware you can currently only invest in US fractional shares, and not UK ones. I’m not au fait with the underlying mechanics but imagine the apps are riding on the US exchanges’ rails.
Half a chance
The platforms argue that enabling fractional share is a more democratic way to invest, because it allows people to put small amounts of money into individual (US) shares.
Sure, though I suspect it’s also so they can better maximise smaller trade sizes.
In my example you could put £400 into Amazon shares without the broker having to round down your order to the nearest share.
That makes it easier to get all your money invested. A win for the broker as well as the investor.
So what’s the problem? The issue is to do with what counts as a ‘qualifying investment’ in the ISA rules.
From HMRC’s perspective, that’s a fact and not an opinion. And the ISA rules which HMRC is following no doubt pre-date trading in fractional shares in the UK. They were written with some consumer protections in mind, so everyday ISA investors wouldn’t be encouraged to go spreadbetting or similar.
(Of course an ISA investor is free to put their money into spivvy small-cap mining stocks, but that’s a different kind of risk…)
Freetrade’s CEO Adam Dodds is quoted in the Investor’s Chronicle as saying:
Our fractional shares give retail customers ownership of a portion of an actual company share. They are not a derivative contract.
The protections and benefits for retail investors are effectively the same as for whole shares.”
I guess I can see both sides.
The tax authority surely must uphold the rules as it sees them.
But it’s hard to see how this interpretation serves anyone’s best interest, and it would surely be trivial for the government to fix.
On that note Freetrade has created a template letter that you can use to lobby the Treasury on the issue.
I’ve just noticed Freetrade suggested the deadline was yesterday. Oops! However I’ve clicked through and the Treasury still seems to be taking online representations.
If you want to give it a crack:
Have a great weekend!
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The Simple Path to Wealth by JL Collins – £0.99 on Kindle
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– Sebastian Mallaby, The Power Law
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Disclosure: I’m a shareholder in Freetrade.
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