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ISAs: THE END OF FRACTIONAL SHARES?
In the fast-paced world of investing, opportunities are aplenty. For many, the dream of owning a piece of tech giants like Apple, Amazon, or Tesla is not far-fetched, thanks to brokerage platforms and apps that allow you to hold fractional shares within your Individual Savings Account (ISA). However, a brewing dispute between the UK tax authority and these platforms casts a shadow over this exciting landscape, potentially affecting tens of thousands of young investors. In this article, I will explore what an ISA is, why HMRC are concerned and how this might play out in the Autumn Statement.
How do ISAs work?
ISAs are a popular choice for many UK investors. These tax-free accounts let you save or invest up to £20,000 each tax year, splitting your money between cash and other investments. The best part? No tax is payable on the interest, dividends, or capital gains you earn from your investments, and withdrawals don’t attract income tax. It’s a fantastic way for people to build their nest egg or invest for the future.
What are fractional shares?
The world of investing has evolved and with it, the desires of young investors. They want to dip their toes in the stock market without breaking the bank. This is where fractional shares come into play.
Fractional shares allow you to own a piece of those pricey stocks previously out of reach. For as little as £1, you can buy a fraction of a share in a company, effectively owning a slice of giants like Amazon or Apple without needing hundreds of pounds. It’s a game-changer, especially for students and young investors who may not have substantial sums to spare.
Why is HMRC concerned?
HM Revenue & Customs (HMRC), the UK’s tax authority, believes that fractional shares should not be allowed within ISAs, despite platforms arguing otherwise. They recently held a meeting with industry figures and Treasury officials, sticking to their guns and suggesting that this type of investment shouldn’t be eligible for tax-free treatment.
What is at stake here?
The ramifications of this dispute are significant. If HMRC’s viewpoint prevails, investors holding fractional shares within ISAs might be forced to sell their holdings. Worse, they could be required to pay taxes on their gains and face penalties for late payments. Imagine the disappointment of having to liquidate your stake in a promising tech company or coughing up taxes on your hard-earned returns. That’s not a scenario young investors or anyone else wants to face.
Why should young investors be interested?
For young investors, this dispute could have far-reaching consequences. Fractional shares have been a gateway into the world of investing, allowing them to get a taste of the action and grow their portfolios. Excluding these fractional shares from ISAs could dent confidence, discouraging young people from investing in the first place. It’s a move that, according to Peter Komolafe, founder of the popular Conversation of Money podcast and social media channel, “would do irreparable damage in getting young people to invest.”
What happens from here?
The industry and platform providers are eager for a resolution. They had hoped that the government’s goal to simplify ISA products and encourage more people to save and invest would lead to a favourable interpretation by HMRC.
However, it seems that more clarity is needed. Adam Dodds, the CEO of investing app Freetrade, has urged customers to lobby the Treasury, emphasising the need for explicit clarification on fractional shares as a qualifying ISA investment. The goal is to put this matter beyond doubt and allow investors to continue enjoying the benefits of fractional investing.
The good news is that a resolution might not require an extensive legislative change. The Investing and Savings Alliance (Tisa), a trade body, suggests that clarifying the 1998 ISA rules could put this dispute to rest. This clarification would be an excellent solution, as it aligns with the interests of investors with smaller sums of money who want to build tax-free investments for the future.
We await further clarity and resolution, which may well be offered in the Autumn Budget in November. Until then, it will be interesting to watch this space!
For more information on this topic, see this article from the FT – https://www.ft.com/content/69f5f445-98b7-4911-8e36-d26bd2545344
Article written by Avishai Marcus
THE LAW COMMISSION’S PROPOSED REFORM OF THE ARBITRATION ACT 1996
Arbitration is an essential mechanism for resolving complex cross-border commercial disputes. It is attractive to businesses as the arbitrator usually possesses a high level of expertise concerning the conflict, often lacking within the judiciary.
The Arbitration Act 1996 (‘the Act’) supports this process by creating ‘the framework for arbitrations conducted under English procedural law’, and as a result, the Act is the primary facilitator for the UK’s privileged position as the top international commercial dispute resolution destination.
Nonetheless, some contend that current arbitration processes are comparatively antiquated, and such shortcomings expedite reputational loss, loss of heavyweight clients, the diminution of the sector’s growth, its affluence, and the precarity of the UK’s position.
In response to these concerns and in November 2021, the Law Commission, following employment by the MoJ, announced its intent to review the Act from January 2022 to preserve the UK’s leviathan status in international arbitration. Its consultation was in two parts, the first in September 2022 and the second in March 2023, with the Commission warning that the review was somewhat limited and not a call for a complete overhaul of the Act.
Justifications for review
There is some consternation within the legal sector and, subsequently, some criticisms of the Commission’s intent, with the commonality being that if current procedures remain effective, there should be no need for unnecessary changes. Indeed, the UK remaining ascendant as the preferred destination for dispute resolution would prove the current legal framework is efficient and fit for the task.
In its 2021 report, ‘Adapting Arbitration to a Changing World‘, Queen Mary University observed that Hong Kong, Paris and Geneva proceed the UK (more precisely, London) and jointly Singapore as the most preferred seats for international arbitration. Previously, the UK took pole position, thereby evidencing that the UK’s status is increasingly under threat. Such perceived threats greatly influenced the Commission’s overarching reasons for review.
Delving into intricacies, the Commission has stated that the UK needs to reform the Act as other arbitration centres, for example, Singapore, in keeping pace with modernisation, have consistently modified their arbitration laws. Contrarily, ‘the English Arbitration Act has stood unchanged for a quarter of a century since 1996’, effectively narrowing the gap between the UK and its compeers as per the 2021 report.
The points of focus as stated by the Commission included, although not limited to:
- The electronic methods for the service of documents, virtual meetings and arbitration awards (the formal document explaining the binding judgment or decision of an arbitral panel or tribunal), owing to the technological advances in communicating and alternative modes of working since the Act was introduced in 1996.
- The procedures for challenging an award in whichever jurisdiction.
- The powers exercised by English courts in supporting arbitration affairs, for example, emergency arbitration, a procedure unknown when the Act was introduced in 1996.
- Laws on privacy and confidentiality during and after proceedings and
- Appeals on points of law.
The Act has rare unwavering status in the legal sphere; it is regarded as one of the most well-crafted pieces of crucial legislation, as it is ‘clear and concise’…marrying the best traditions of English arbitration law with the innovations of the UNCITRAL Model Law’.*
The Commission was, however, adamant in its justification that a review does not guarantee the amendment of the Act and that if there were any amendments, they would be minimal in complementing the Act’s potency and international legislative advancements.
The recommendations and impact
Following the consultations, the Commission published its final report, including draft legislation to affect the recommendations, on 6 September 2023. Notably, the distinctly minimal amount of recommendations not only attest to the existing strength of the Act but also mitigates any concerns of an overhaul.
In justifying the position for its recommendations, the body stated that efficiency, impartiality, a reinforced immunity for arbitrators, and certainty, for example, proposing the granting of additional powers (through orders) to arbitrators to compel third parties to either uphold decisions or conduct themselves accordingly, were the most pertinent factors for the final draft of its report.
Some of the proposals stemming from the consultations include:
- Clarifying the powers of a court in support of arbitration and the utilisation of emergency arbitrators.
- Fortifying an arbitrator’s immunity in circumstances of resignation and removal applications.
- The codification of the duty of disclosure and
- The introduction of summary disposal (especially for vexatious or unmeritorious claims).
As foretold, the Commission remained lightfooted with its proposals as they do little to overwhelm the current framework. Instead, they gently advance English arbitration in keeping abreast of competitors for the primary international seat.
There is widespread support for these proposals, with the CEO of the Chartered Institute of Arbitrators (CIArb), Catherine Dixon, stating of the Commission’s recommendations that ‘as well as underpinning the attractiveness and competitiveness of London as an arbitration seat, the Act forms the basis of legislation in many other jurisdictions, lending global significance to this development’.
Whether the government is willing to include the recommendations as part of its legislative agenda remains to be seen, but for all intents and purposes, the Commission has set the groundwork for potential change, a change supported by many.
*UNCITRAL is a subsidiary organisation of the UN General Assembly, and its Model Law is a multi-jurisdictional instrument which aims to reform and harmonise respective national arbitration laws, thereby ensuring uniformity in pursuit of fairness and justice.
Article written by Aqua Koroma