Hey guys, it's Sasha HMC Have just announced that UK Investors are apparently not allowed to hold fractional shares in their Isis and given that every single popular investing platform offers fractional shares in their Ises, the Tax Man is now in a Mexican standof with pretty much everyone in the UK who has a stocks and shares. Isa You are breaking the law and you will pay for it according to H The rules that were put in place in 1998 do not permit fractional share and therefore everyone who has any fractional shares in their account will have to sell them. But even worse than that, Hm is apparently claiming that everyone is going to have to pay a boatload of capital gains tax on those fractional shares because they shouldn't have been allowed to have them in the Ice in the first place. so they'll have to pay the tax when they sell them now.

I Am going to show you the relevant bits of the law and explain why Hmrc is full of and I'll also explain why pretty much nobody should be paying any tax whatsoever, even if Hmrc will force everyone to sell those fractional shares held inside their Ises. But first, the timing on this is pretty interesting and smells pretty bad because in the last few years the UK government has changed the law to reduce the 0% band on capital gains tax outside of Isis. it used to be 2,300 per year. This year is dropped to 6,000, Next year is dropping to 3,000 And do you think that's where they're going to stop? Do you think it's definitely not going to go any lower? Well, 8 years ago, if you were a basic rate taxpayer, you didn't have to pay dividend tax at all.

Then they changed that. they introduced a dividend tax allowance which was 5,000 and you had to pay tax above that. Then in 2018 it dropped to 2,000 The 0% allowance this year is dropped to 1,000 and next year is going down to 500. So they've reduced capital gains allowance by 76% so far over 2 years.

But they're most probably going to keep reducing it in the future as well until it's basically zero. And the reason this is really important is because you are allowed to have fractional shares in your regular investing account outside of your Isis Perfectly fine. And for small investors, regular people who maybe put in 100 maybe2, 200, maybe less into their Investments every month. That allowance was enough so that even if your Investments grew, even if you dared make a little bit of capital gains, you wouldn't have to pay any tax on it because it was so little compared to the allowance.

But now using an Isa has become a whole lot more important. And although Isis have offered fractional shares for many years now, it's kind of weird that the Hmrc has only now become interested in this issue. where were they 7 years ago? But let's look at the Crux of the issue. here is the Individual Savings Account Regulations 1998 and this is the bit that talks about qualifying Investments for stocks and shares Isa Remember this regulation is from 1998.

This is way before fractional shares were a thing. This is from way before most people knew what the heck Investments were and how they worked. This is from a time when you needed at least 5,000 or 25,000 or whatever just to open and invest account so that you could make a trade. and if you wanted to make a trade, you needed to call your broker on the telephone.

I Think context is important. So this regulation specifies the kind of Investments which may be purchased, made, or held under a stocks and shares component qualifying Investments for a stocks and Shares component to which paragraph One refers are, and the first item on the list is shares not being shares in an investment trust, one issued by a company wherever Incorporated and two subject to Parag 3 officially listed on a recognized Stock Exchange And there are two issues that the Hmrc sees here. The first is the definition of shares because according to Hmrc, the word shares does not include fractional shares. fractional Shares are not the same thing.

But the bigger issue is that second bit because in order for you to be able to invest in shares, according to this definition, they have to be officially listed on a recognized Stock Exchange and HBC holds that fraction shares technically do not trade on a recognized Stock Exchange Huh? That's that's the difference, right? But here is why that argument is a boite load of baloney. Hmrc's point is that fractional Shares are held by your broker and are then subdivided between different people who then own these fractional components. So technically, instead of owning a share of a company, you owe some kind of IOU from your broker for a bit of a share of a company. and you can't just turn up to the new York Stock Exchange.

You know, wave your IOU from your broker and sell it there. So that makes fractional shares ineligible because they're technically not the same thing. Now, there is a separate bit of legislation which says that all share assets held in Isis have to be fully segregated. So any stocks that you hold in an Isa are held in a separate nominee account, so that if the broker was to ever go bust, have some kind of financial troubles, those shares cannot be touched and you should be able to get them back.

These rules about accounts do not exclude fractional shares. So whether you hold full shares, fractional shares, whatever, they have to be segregated in the same exact way. And if we're going to be really pedantic, most UK Brokers don't keep your shares in your name anyway. Even full shares.

Most UK Brokers will hold them on your behalf, but the actual Shares are held in a nominee account in the name of a nominee company, not in your name. So if you wanted to work into NASDAQ and sell your shares, you can do that. Whether you hold fractional shares or full shares, they're not in your name anyway. In fact, you can't even get a proper shareholder certificate for your full shares because you don't own them, they're not held in your name.

The nominee system is really, if you actually dig into it pretty much the same exact IOU setup under a different brand. But this is technicalities and it's not even actually particularly important because the 1998 law isn't trying to address technical specifics. The whole point of this law is to determine what types of assets, the nature of those assets, what kind of things you are allowed to hold in your Isa. So it says you can hold cash and you can hold shares.

and the reason that this list exists is not to determine whether fractional Shares are technically slightly different and therefore do not qualify. It exists so that people don't go and buy into scams. It exists so that people aren't sold inside their Isis. It exists so that people don't go and invest in Nfts and monkeys wearing funny hats and other stuff like that.

That is the reason why this list exists. It was created many years before retail investors were able to buy fractional shares. Remember, Hmrc is so Advanced by the way that you can't submit any financial paperwork to them today in 2023 that includes pennies, you have to round everything up to the nearest pound and then have issues where things don't add up properly because that is how it used to work on paper forms. Now, there is a lot of legislation out there that talks about Concepts without needing to stipulate what happens in the weird French Cases like with fractional shares because it's common sense and judges are able to interpret it and so can people.

The Car Tax Act of 1983, for example, says that you have to pay car tax on a chargeable vehicle. Note the article: A In a chargeable vehicle, it presumes a whole vehicle. I Guess guess according to Hmrc, if I was to say throw away the ashtray, maybe unscrew the aerial, then my car stops being a vehicle and becomes a fractional vehicle. And I guess I can just stop paying car tax altogether because although a fractional vehicle has much of the same exact characteristics as that of a full vehicle, for some strange reason, the regulation back several decades ago did not prescribe exactly that.

You also have to pay tax on fractional vehicle. Is this roughly how this logic? Works fractional shares give you the same exact economic benefits as full shares. It is not any kind of instrument or a derivative or anything of the original share because it has a one toone exact translation of every key characteristics when it comes to holding stocks in your portfolio. when you're trying to determine, is it the same class of thing you would determine if you were not trying to be deceitful that it is.

When a stock goes up 20% the value of your fractional share goes up 20% You can trade them in the exact same hours in the exact same way. When a stock pays a 6% dividend, you also receive a 6% dividend. But probably the funniest thing in all of this is that the Hmrc is saying that everyone who holds fractional shares is going to have to pay a load of tax. The media went absolutely crazy on this one.

Or the Hmrc might find all of the Brokers to recoup the tax so they don't have to collect it from the people. But there are some major major problems with this. First, up until last year, the taxfree allowance for capital gains was 12,300 and this year it's 6,000 The specific issue that Hmrc seems to have applies only to fractional shares and not to whole shares. So if you have say 150.0 three shares of a company, the capital gains problem only applies to the3 By the way.

I Am curious if Hmrc could answer this one. If you you say go and buy half a share in a company and then you go and buy another half a share in the company according to Hmrc, do I now own one share of A company which is perfectly legal inside an Isa or do I own two half shares of that same company which are both illegal. Both the half Shares are illegal answers on a postcard. Anyway, the thing is, if you hold stocks, only a small proportion of your overall investment will be in fractional shares, and the majority typically will be in whole shares.

And even if you are guilty, let's assume that the Hmrc is right. You broke the law by buying fractional shares. you would have to pay capital gains tax on your fractional shares alone. And those fractional shares just those little bit extra would have to increase in value by 12,300 every year up to last year before you have to pay a single penny in tax.

So realistically, approximately 0. oh%, of stocks and shares I in investors would qualify to have to pay any tax at all. But Hmrc does have a rule which says that if you did not declare this stuff in your tax return, then you don't get to benefit from the 0% allowances. So retrospectively, even though you would have gotten them at the time, you don't get a benefit.

So you have to pay capital gains on the whole thing. And we all know that ignorance of the law is no excuse, right? Well, except it is. The Hmrc Internal Compliance Handbook has this bit called Ch1 160 6. Reasonable excuse Ignorance of the law.

A person may have a reasonable excuse if they were unaware they had a legal obligation to do something or misunderstood an obligation. If a person has done their best to ensure that they are aware of and understand their obligations but missed a particular requirement, they may have a reasonable excuse for the failure. So you are a law-abiding citizen, you see that every single broker in the entire country that offers you Isis lets you buy fractional shares. You also that every single one of those Brokers is fully authorized and regulated and licensed by the Financial Conduct Authority So you might naturally presume that the idiots at the Sca maybe checked what it is that the companies that they regulate and have been regulating for like the last 8 years.

What it is that they are selling and what they are doing. And you might come to this very natural conclusion that if every single broker lets you buy fractional shares and the FCA, the government, the who regulate these Brokers have said nothing about it for this long, then maybe it's okay, maybe it's perfectly fine and legal and you are completely fine to do it. And I have a funny feeling that if this situation ever came in front of a judge, The Regulators will get their ass handed to them on a planter. Unless the system is so corrupt that even the judges are complicit and somehow get paid off, there is absolutely no way in any reasonable world that the HMC can force anyone to pay any tax on this given this information, but here is what I actually think is happening.

All of this stuff got put out there to scare people to let the media print some kind of Jeremy Hunt will be delivering the Autumn statement on the 22nd of November and just over a month and he's already said that he wants to simplify Isa rules and encourage people to invest in stocks and shares. Isis So the timing of this move by Hmrc stinks really bad because I have this funny feeling the government has made this whole issue up on purpose so that the Chancellor can emerge from the fog, put on a superhero cape, and pass a clarification law that says fractional shares inside Isis are okay. They are allowed and nobody will have to pay tax so that he can get credit for solving a problem that wasn't ever a problem in the first place. If you want to be a badass and break the law by buying some fractional shares in an Isa, check the links to my favorite Isis in my description.

Thank you for watching and I'll see you later.