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Fractional shares can make it more affordable for taxpayers to invest in companies where the price per share may be very high, as is the case, for example, with certain US companies. From an investor's perspective, there is unlikely to be any real practical difference between holding fractional entitlements and whole shares. For that reason, the general view in the industry had been that a fractional entitlement to a share could still be treated as a "share" for the purposes of regulation 7(2)(a). However, in October 2023, HMRC publicly revealed a new strict interpretative approach: "a fraction of a share is not a share and therefore cannot be held in ISAs".

Following industry pressure, the previous Conservative government announced at the Autumn Statement 2023 that it intended to change the law to specifically reference fractional shares and therefore put the matter beyond doubt for future periods. Although it was originally hoped that such change would be introduced with effect from the start of the 2024/25 tax year, it was later confirmed at the Spring Budget 2024 that new legislation would not be introduced before the end of this summer. The subsequent general election result then cast further uncertainty on this issue.

According to recent reports, HMRC has now clarified that the proposed legislation will go ahead under the new Labour government, with an announcement expected at the upcoming Autumn Budget and with any changes to have effect potentially as early as 30 September 2024. 

Critically, HMRC's position had previously been that it would still pursue ISA managers in respect of periods before any new legislation came into force. This would have seen affected ISA managers facing material tax assessments for earlier periods (as well as potential penalties and even, in the worst case scenario, their ISA manager approvals being withdrawn). Fortunately, however, HMRC is now quoted as having reversed that position: "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."

HMRC's "Litigation and Settlement Strategy", its framework for conducting disputes with taxpayers, broadly provides that any settlement must accord with HMRC's interpretation of relevant law and that HMRC cannot settle for less than it thinks can be achieved through litigation. On that basis, part of its new "pragmatic approach" must stem from the resistance posed by affected ISA managers and the belief that HMRC is likely to lose should this issue go to court. The case of fractional shares therefore serves as a useful reminder not to accept HMRC's technical position at face value.