HMRC changes Isa rule for investors – can you benefit?

HMRC has announced that it will drop the ban on fractional shares being held in a stocks and shares Isa, in a move to make investing more accessible.

Investors will be able to buy a portion of a share for less than the cost of a whole share, while keeping the tax-free benefits of an Isa on any money they earn on their investment.

Here, Which? takes a look at the rule change and whether fractional share investing could be right for you.

Please note: the content contained in this article is for information purposes only and does not constitute financial or investment advice.

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Why invest in fractional shares?

When you invest directly in shares, you’ll likely know what it is you want to invest in. Otherwise, you’d be better off investing in a fund or a trust which are making those choices for you.

But, sometimes a prohibitively high share price can get in the way of investor plans, especially those with less money.

For example, if you wanted to invest in the streaming service Netflix, a single share would cost $677. At a slightly less steep but still hefty price for many savers is Apple, with its shares currently selling at $217 each.

Allowing people to buy into companies like these for just a fraction of that cost aims to broaden accessibility and encourage consumers to invest more of their money, especially those who are put off by the high cost of buying into an investment.

Fractional shares give shareholders slightly different rights – for example, you don’t tend to get voting rights, so you can’t attend shareholder meetings and vote on proposed measures.

You’d also need to sell any fractional shares before transferring to another provider.

• Find out more: how to buy shares.

Who offers fractional share investing?

Despite being previously unacceptable within HMRC terms, some investment platforms already allow fractional investing in a stocks and shares Isa.

HMRC said last year that it might reclaim any tax savings made on the fractional shares in these Isas, but the recent announcement is a reversal of that stance.

Of the platforms we reviewed this year, Freetrade, Moneybox and Plum all currently offer investing in fractional shares. Moneybox and Plum are also exclusively app-based.

Now with the backing of HMRC, other platforms may move to add fractional shares to their offering. Although, as the announcement is still fresh, it may be some time before these changes come into effect.

• Find out more: best stocks and shares Isas 2024.

Are there other cost barriers to investing?

Most platforms have a minimum investment threshold and some much higher than others. 

If you were regularly putting money into a stocks and shares Isa, the most expensive to get started with is Vanguard, which requires a monthly £100 investment or £500 lump sum.

Freetrade, Moneybox, Monzo and Plum all offer investing from £1. 

Other platforms, such as Bestinvest, Hargreaves Lansdown, and Interactive Investor, don’t have a set minimum investment for shares, beyond the cost of the individual share.

As well as whether you have the money to meet minimum investment requirements, it’s important to make sure that you have an emergency savings fund.

Before you start investing, you should make sure you have between three and six months’ worth of income in an easy-access account, in case of any unexpected expenses.

• Find out more: best investment platforms in the UK 2024.

Tips to get started investing in stocks

• Don't invest if you have high-interest debts You’ll be better off paying off high-interest debts, such as credit cards, before investing as you’ll likely build up more on your debt than you will get in returns on your investments.
• Be sure the risk is right for you Consider your goals and how soon you would need to spend the money you plan to invest.
• Don’t invest everything in one share Spread your money out across shares based in different sectors and countries, as well as other assets.
• Make use of stocks and shares Isa allowances You can invest up to £20,000 tax-free in a stocks and shares Isa each tax year, otherwise you might need to pay tax on any returns you make.
• Think about your investments in the long term You should stay invested for at least five years, wherever possible, so your investments have enough time to grow.