Almost all UK investment platforms have been breaking HMRC rules by allowing stocks ineligible for tax relief to be put in ISAs, a City AM investigation has revealed.

AJ Bell, Fidelity, Interactive Investor and many others have been allowing stocks that should not get tax-free status to be added to ISA portfolios, meaning capital gains tax will not be paid on their returns.

HMRC rules dictate that shares can only be put in a stocks and shares ISA and receive tax relief if the common stock trades on one of the government’s recognised stock exchanges.

Examples of stock exchanges not recognised by HMRC include the Shanghai Stock Exchange, Saudi Stock Exchange, and Taiwan Stock Exchange, while the rule also excludes companies that do not have common stock traded on any exchange.

This is to make sure investors cannot invest in an illiquid stock that may be risky for ordinary investors to hold in their ISAs, though investors are still allowed to hold these outside of an ISA.

One example of this is Taiwanese chipmaker TSMC. The firm has a primary listing on the Taiwan Stock Exchange but has a secondary listing on the American Nasdaq.

However, since the stock is only listed on the Nasdaq through an American depositary receipt (ADR), not as common stock, it should not be allowed to be included in ISAs, and capital gains tax will have to be paid on any returns from its growth.

AJ Bell and Fidelity ISAs

A Bloomberg investigation recently found TSMC could be added to ISA on AJ Bell and Fidelity, but this option was quickly removed following the revelations.

However, City AM was still able to add Chinese company Legend Biotech to a Fidelity ISA, despite not having its ordinary shares traded on any exchange.

A Fidelity spokesperson said that as a result of this, it was looking into the matter and discussing it with HMRC, having removed the option to buy Legend Biotech from ISAs.

“We will continue to engage with HMRC and ensure that any impact for our customers is managed quickly, sensitively, and at no financial cost to the clients,” they added.

Meanwhile, AJ Bell allows French advertising company Criteo to be added to an ISA, which is also not eligible for the tax perk.

“This issue affected a small number of customers who will be given the option to either continue to hold the stock on the platform outside of an ISA if they wish, or they can sell the investment to correct their position at zero cost to them,” said an AJ Bell spokesperson.

However, the issue stretches well beyond just AJ Bell and Fidelity. On Interactive Brokers, City AM found that TSMC could be added to an ISA.

“Interactive Brokers has procedures in place to ensure that only qualifying investments are included in our ISA offering,” said a spokesperson for the company.

“To the extent ineligible securities, including certain Depository Receipts such as TSMC, might have inadvertently been permitted in clients’ accounts, Interactive Brokers will act in accordance with the ISA Regulations and Guidance so that clients are not unduly disadvantaged.”

‘My entire portfolio should not be in an ISA’

Investment platforms have repeatedly allowed these schemes to exist on their platforms, with little discernible action from the regulator.