HMRC change will protect hundreds of thousands of savers from tax bill

The tax-free savings accounts shelter cash or investments from the taxman with up to £20,000 allowed to be squirrelled away in each tax year

People with a few quid in the bank can breathe easy thanks to a change to ISAs. Savers will be shielded from unexpected tax charges due to a crucial amendment to Individual Savings Accounts (ISA).

These tax-free savings accounts safeguard cash or investments from the taxman, with up to £20,000 permitted to be stashed away each tax year. This implies that you won't pay any income tax or capital gains tax on the interest earned, dividends received, and profit made by selling investments held in an ISA - making it a useful tool for those aiming to increase their wealth.

Some investment ISA platforms had been permitting savers to purchase fractional shares in popular firms and storing them in ISA accounts.

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However, following a dispute between HMRC and investment companies, the government stated that under current regulations, these part shares were not recognised, meaning any of these investments would not benefit from the tax-free wrapper.

Investment platform Freetrade ceased selling partial shares at the beginning of this tax year due to concerns that savers could have been liable for tax on interest, dividends, or sales from these investments - despite them being held in an ISA.

Freetrade estimates that several hundred thousand investors hold partial shares in ISAs. However, the government has now confirmed a change to the rules, allowing investors to hold partial shares in ISAs.

Savers who already possess partial shares will continue to enjoy tax-free protection even if they hold the investments before the rule change.

A spokesperson for HMRC stated: "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."

Viktor Nebehaj, CEO of Freetrade, commented: "We've stood firm in our support of retail investors to ensure that we reached a sensible resolution on this issue. Fractional shares enable investors to build a diversified portfolio and access a wider range of investments. We have always maintained that fractional shares meet the criteria to qualify to be held in an ISA. We're pleased to have worked closely with government and HMRC to reach an outcome that benefits retail investors in the UK."