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What was it that first sparked your interest in investing?
For 28-year-old FT Money reader Nathan, it was a childhood spent watching Formula One. He remembers asking one day: “What is Shell?”
The power of Shell’s brand was his entry point into investing; learning about what a company is, and how investors could own a piece of those listed on the stock market.
Fast forward to the pandemic and Nathan became one of many new investors using trading apps to put their money into the markets.
“I’ve never gone in for meme stocks like Bed, Bath and Bankruptcy,” he jokes. He holds some UK-listed companies in his Freetrade stocks and shares Isa, but is more attracted by the global growth potential of giant US-listed brands like Meta, T-Mobile and Mastercard.
There’s just one problem: their share prices. At the time of writing, a single share in Mastercard is $380 (around £300).
It’s a similar story for other US stocks whose omnipresent branding makes them highly popular with new investors all around the world.
Amazon currently trades at $129 (£102) per share; Apple at $189 (£150); Tesla at $256 (£203); McDonald’s at $291 (£231) and Disney at $89 (£70).
“If you’re new to investing, I don’t think many people have the money to buy these stocks outright — and you probably don’t want to advance that much into a single stock in one go,” Nathan says.
The solution? Fractional investing. In the UK, investment apps including Freetrade, Moneybox and Trading 212 offer the ability to buy fractions of pricey US shares from as little as £1, enabling stock pickers with less money to build a more diversified portfolio.
Fractional shares are commonly offered by US brokerages, and although the major UK Isa platforms don’t offer them, plenty of trading apps do, and have done so for a while (since 2020 in the case of Freetrade).
However, a row is brewing over whether UK investors should be permitted to hold fractional shares within tax-advantaged stocks and shares Isa accounts.
“Fractional shares cannot be held in an Isa,” is the official line from HM Revenue & Customs, which adds: “Isa managers must make sure the investments they offer are Isa eligible.”
The issue boils down to the wording of Isa legislation dating back to 1998 — decades before trading shares (or fractions thereof) on a smartphone app would have ever been thought possible.
Qualifying Isa investments include shares. The rules do not specify “fractions of a share”, but neither do they explicitly exclude them.
Apps offering fractional share trading within Isas have sought legal opinion on what they see as HM Revenue & Customs’ interpretation of the rules, and for now, continue to offer this option to their Isa investors.
Meanwhile, consumer finance body The Investing and Saving Alliance (Tisa) has been continuing discussions with the Treasury and HMRC to find a solution, and update the Isa legislation to allow it.
“This has the potential to create two tiers of investors — those who have enough money to create a globally diversified portfolio, and those for whom the door is locked because they don’t have enough money, and we don’t think this is fair,” says Lisa Laybourn, head of technical policy at Tisa.
She points out that the way whole shares and fractional shares are held are no different — in nominee accounts, which hold a relevant number of shares in trust for each investor — thus sharing the same legal and consumer protections.
There’s one big difference. Fractions of shares cannot be transferred to another Isa provider, so liquidity is a valid concern.
Tisa would like to see the regulatory guard rails for Isa managers strengthened, guaranteeing they would buy back the fractional shares when an investor wanted to transfer or withdraw their holding. This currently happens in practice, but a regulatory obligation would help address any perceived risk.
Yet investors would be forced to sell down any fractional Isa holdings if the clamp down progresses, although they could still trade them within a general investment account.
Depending on how well their Isa portfolio has performed over a given period, they could be left with a tax liability plus the possibility of being fined for late payment.
In my view, the Isa managers who sold fractional investments should have to make good any tax charges — but given the small sums at stake here, I doubt many investors would have much tax to pay.
The five US tech giants listed above are currently the most popular single stock picks on the Moneybox app. “These are the ones that capture the imagination of our Isa investors,” says Brian Byrnes, head of personal finance at Moneybox, which also offers an array of passive funds and ETFs.
Its customers are typically in their 20s and 30s, and make average weekly deposits of £23 into their accounts. Some round up and invest their digital spare change from online banking transactions.
After three years of carefully investing small sums, Nathan’s whole portfolio is valued at less than the £6,000 annual capital gains threshold. He does own some fractions of dividend-paying stocks, but receives nowhere near the (reduced) dividend tax threshold of £1,000.
Obviously, not all investors using trading apps will fit this profile. His incremental buy and hold approach no doubt contrasts with some risk- taking day traders who could have made much more money tax-free within their Isa accounts.
But the biggest downside to the anti-fractional stance is the damage it could do to investor engagement. What message are we sending out to the next generation of investors if accounts are closed and fines threatened?
They might have started by dabbling in fractional shares of the brands most familiar to them, but that’s not where the buck will stop. Learning how to invest is a valuable life skill. Getting to grips with this in your 20s and 30s provides a foundation of knowledge that can be built on as they manage their portfolios in decades to come.
Frankly, I think we should praise investors who discover the benefits of Isas at a young age, not threaten to penalise them for only being able to afford fractions of shares.
And there’s always the worry they will succumb to the allure of far riskier, unregulated products such as cryptocurrencies. Nathan is proud that he avoided all of that, but feels that banning fractional investing within Isas would be “a punch to the stomach”.
“Part of the problem is that when you think of Isas, you think of people who can get to the £20,000 annual limit, but I think investing should be for everyone.”
I couldn’t agree more and strongly hope the Isa legislation can be updated to accommodate this.
Claer Barrett is the FT’s consumer editor and the author of ‘What They Don’t Teach You About Money’. claer.barrett@ft.com Instagram @Claerb
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