Hundreds of thousands of savers will be protected from shock tax bill after huge HMRC rule change

SAVERS will be saved from shock tax charges thanks to a key change to Individual Savings Accounts (ISA).

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.

This means paying no income tax or capital gains tax on the interest earned, dividends paid to you and profit made by selling investments held in an ISA – making it a handy tool for people trying to grow their wealth.

Some investment ISA platforms had been allowing savers to buy partial shares in popular companies and holding them in ISA accounts.

However, after a row between HMRC and investment firms, the government had said under current rules it did not recognised these part shares meaning any of these investments would not benefit from the tax-free wrapper.

Investment platform Freetrade stopped selling partial shares at the start of this tax year over fears that savers could have been exposed to tax on interest, dividends or sales from these investments – despite them being held in an ISA.

Freetrade estimate that several hundred thousands of investors hold partial shares in ISAs.

However, the government has now confirmed a change to the rules and that investors will be allowed to hold partial shares in ISAs.

Savers who already hold partial shares will still be able to benefit from tax-free protection even if they hold the investments before the rules change.

An HMRC spokesman said: “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, chief executive of Freetrade, added: “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.”

Partial shares are particularly attractive to less wealthy investors as it allows them to still hold stock in popular companies such as Apple and Amazon where single shares can be worth hundreds of pounds.

A date for the new rules has not been given but more details are expected to be revealed in the coming weeks.

Alice Haine, personal finance analyst at online investment service Bestinvest by Evelyn Partners, said: “The share price of many major US companies is prohibitive for small investors so allowing fractional share ownership within a tax-efficient ISA make investing more accessible. 

“This is a particular boon for younger investors, who may be attracted to more popular stocks they are familiar with, such as Apple, Amazon or Tesla, that were previously out of reach because of their high price.”

With any type of investments it’s important to know that you can lose money if the value falls.

Investing in single investments can also be quite a risky strategy for investing, particularly if you have little experience.

Alice added: “Individual stock-picking can be challenging, which is why a more sensible strategy for investors, particularly younger, less experienced investors, is to build a well-diversified portfolio of funds.”

“Rather than focusing on individual stocks, savers can adopt a more diversified approach across different sectors and regions and across a variety of assets. “

Funds hold a range of different investments allowing investors to spread their investment risk.

You shouldn’t buy investments that you don’t understand or where the risks are not clear.

If you want to make investments, a financial adviser can help talk you through the options.

IS AN ISA RIGHT FOR YOU?

It depends on your circumstances but if you are ready to start investing, a stocks and shares ISA is probably your first port of call.

You should typically only invest if you don’t need to access money for five years or longer.

This in theory should give you time to smooth out any losses that may be incurred in the short term.

If you think you could need to access money soon, you can opt for cash ISAs which help you avoid legally paying tax on interest.

If you are a basic rate taxpayer you can earn up to £1,000 in interest annually even if it’s not in an ISA.

However, if you are a higher rate tax payer the personal savings allowance is cut in half from £1,000 to £500.

We worked out that if you’re a higher-rate taxpayer and have more than around £9,500 in savings, you should put it in a cash ISA.