HMRC updates ISA Regulations to recognise fractional interests and make certain other changes

On 15 October 2024, the UK Government published the Individual Savings Account (Amendment) (No 2) Regulations 2024 (“the Regulations”), which will make certain targeted amendments to the Individual Savings Account Regulations 1998, SI 1998/1870. This follows a short technical consultation that ran from 2 to 16 August 2024.

The Regulations will bring into effect several changes, including expressly recognising that certain ‘fractional interests’ in shares (widely known as “fractional shares”) can be held in a stocks and shares individual savings account (“ISA”), clarification that ISA managers must obtain a National Insurance number in relation to new ISA applications (unless the account investor does not have one, in which case confirmation of that fact is required), and updating the rules on transferring current year subscriptions between ISA managers.

The changes bring welcome certainty to retail platforms offering fractional shares in ISAs, their customers and their broker/dealers. The market had been disrupted following the publication by HMRC of a statement in March 2023, in which HMRC first made public its view that fractional shares were not qualifying investments for ISAs.   

Fractional interests in stocks and shares ISAs

The Regulations set out specific requirements that must be met for fractional interests to qualify for investment in a stocks and shares ISA.

In summary, the Regulations:

• allow fractional interests in shares issued by a company wherever incorporated, shares in an investment trust and shares in a UK UCITS, a recognised UCITS or a non-UCITS retail scheme, in each case that are listed or traded on a recognised stock exchange, to be held in an ISA. The last category (UK UCITS etc.) in effect encompasses fractional interests in shares in exchange traded funds (ETFs). Fractional interests in depositary interests are not permitted;
• require fractional interests to be contained in a contractual arrangement. Updated guidance from HMRC is expected to clarify that this should be set out in the terms and conditions of the account (i.e. it does not need to be documented separately);
• require ISA managers to disapply the requirement relating to voting rights and shareholder meeting attendance (which means that ISA managers are not required to provide for some form of proportional voting or proxy meeting attendance);
• in a welcome change from the Regulations as originally consulted on, require fractional interests to be sold or transacted at the open market price, with the price of fractional shares being proportionate to the fraction of the interest in the whole share (whether or not that whole share is purchased from an intermediary or directly on exchange); and
• require ISA managers to retain custody of the relevant whole share as they would for other ISA investments (subject to any applicable sub-custody arrangements).

National Insurance number requirement for new ISA applications

The Regulations confirm that for new ISA applications, ISA managers must either obtain from the investor a National Insurance number, or (for an application for an account that is not a junior ISA or Lifetime ISA) confirmation that the investor does not qualify for a National Insurance number.

ISA managers may incur one-off costs in relation to making changes to support business processes, as well as updating ISA application forms and processes where they are not compliant with the new National Insurance number requirements.

Rules for ISA transfers between ISA managers

The Regulations simplify the process for transferring current year subscriptions from one ISA manager to another by reducing the complexity of reporting requirements on ISA managers. For partial transfers of a current year ISA subscription, including transfers between cash accounts, the transferring manager will only need to report subscription information to the receiving manager where no current year subscription remains with the transferring manager.

Next steps

ISA managers should review and familiarise themselves with the Regulations, and consider whether any changes need to be made to their processes to ensure compliance with the new requirements.

The Regulations come into force on 4 November 2024. HMRC will not take action in relation to holdings of fractional interests in ISAs acquired prior to 4 November 2024, though it has made clear that all fractional shares held in ISAs must meet the requirements introduced by the Regulations, otherwise ISA managers will need to remove them from affected ISAs. The National Insurance number requirement will have effect in the 2025-2026 tax year and in subsequent tax years.

If you have any questions about the changes and how these are likely to impact your firm, please get in touch with the key contacts listed or your usual contacts at CMS, who would be happy to discuss these considerations in more detail.

Co-authored by Jessica Ng