Share lending by platforms and funds

Share lending is an arrangement where the platform or fund that holds your investments lends the shares out to a borrower, usually a bank or another financial firm, which pays a fee for the use of them. You keep the shares and their value; what changes is who holds legal title for the duration of the loan, and what you get in return. On the Freetrade programme, participants receive 50% of the income generated when their shares are on loan, after lending partner fees are deducted, and the other 50% is retained by Freetrade and its partners¹.

The income is small. Freetrade's own worked example for an iShares FTSE 100 ETF shows the arrangement typically generating a return of between 0.01% and 0.03% per year¹. Its published yield calculation is the monthly cash distribution received divided by the average market value of eligible shares, multiplied by 12, and its own illustration of £0.10 on £1,000 works out at roughly 0.12%¹.

What you give up matters more than what you earn. If your shares are on loan, it may not be possible to vote if the opportunity arises, and a dividend paid while shares are out may reach you as a manufactured dividend, which can be taxed differently from an ordinary one¹. Shares held in an ISA are not eligible for share lending at all¹.

How share lending works: your shares on loan to banks

When you buy a share through a platform, the platform holds it for you. Under a share lending programme, the platform can transfer that share temporarily to a borrower, who pays a fee for the use of it. The borrower is typically a bank or another firm that wants the share for its own purposes, such as settling a trade or hedging a position. The share comes back at the end of the loan.

Freetrade describes the eligible pool as all UK and US shares held in a General Investment Account (GIA) or a Self Invested Pension Plan (SIPP), including ETFs and investment trusts¹. If you hold shares in a general investment account or a SIPP, they may be in scope; if you hold them in an ISA, they are not.

Where many customers hold the same stock, the platform does not pick accounts individually. Freetrade uses a proportional basis for US and UK share lending, with every customer having a proportion of their shares lent based on their weighting relative to other customers¹. In practice that means your income reflects your share of a pool rather than a decision about your account.

The platform also keeps some shares back. Freetrade states that where stocks are in heavy demand, the whole pool of available stocks may be lent out, except for an amount kept as a buffer to make settlement quicker for customers who want to sell their shares¹. That buffer is the reason selling normally still works while shares are on loan.

What you earn: typically a fraction of a percent a year

The headline split sounds generous, but the underlying fee is small, so the cash that reaches you is small too. Freetrade's published example for an iShares FTSE 100 ETF shows the arrangement typically generating a return of between 0.01% and 0.03% per year¹. On a £10,000 holding, that is the difference between a rounding error and a rounding error.

The programme's own yield formula is the monthly cash distribution received divided by the average market value of eligible shares, multiplied by 12¹. Its worked illustration, £0.10 on £1,000, gives roughly 0.0012, or 0.12%¹. That is an illustration of the arithmetic, not a promise about what any particular holding will produce.

The split itself is set out in two places. Freetrade's guidance says participants in the share lending programme receive 50% of the income generated when their shares are on loan, after lending partner fees are deducted¹. Its terms say the income will be equal to 50% of the lending fees received from borrowers in respect of your lent shares². Its product page puts it more plainly: you keep 50% of all fees earned when your shares are on loan, with the other 50% retained by Freetrade and the partners who help operate the programme³.

Freetrade also shares its lending fees with the partners who facilitate its share lending activities, and pays this out of the 50% it retains, so it does not affect customer income². That detail matters if you are comparing headline splits between platforms: what is deducted before your half is calculated is not the same as what is deducted after.

Which shares can be lent, and why ISAs are excluded

The pool of shares that can be lent is narrower than the pool you can hold, and the exclusions are worth knowing before you assume a holding is earning anything.

Freetrade states that shares held in ISAs are not eligible for share lending¹, and its terms confirm that it will not use any shares in your Freetrade ISA for share lending⁴. That is a structural exclusion rather than a customer choice, and it follows from the tax wrapper: an ISA is designed to hold investments for the account holder on particular terms, and lending them out sits awkwardly with that.

The platform also excludes some holdings on risk grounds. Freetrade states that it does not currently lend European shares, or ETFs which have been assigned low risk ratings by their manufacturers¹. Separately, synthetic ETFs, which use derivatives to track a benchmark, and ETCs generally do not lend stock⁵. So a portfolio built from European shares, low-risk-rated ETFs or synthetic products may generate no lending income at all.

If keeping your shares out of a lending programme is the priority, an ISA does that by default. A stocks and shares ISA holds investments rather than cash, and the value of those investments can fall as well as rise, so you may get back less than you put in⁶. A cash ISA is different: the money you put in cannot go down, because it is not exposed to the risks of investing in stocks and shares⁶. Stocks and shares ISAs also do not shield your investments from inheritance tax, or from stamp duty when buying shares⁷.

Collateral and borrower quality: what protects your shares

The protection in a share lending arrangement is not insurance. It is collateral: assets the borrower puts up so that if it fails, the lender can sell those assets and buy the shares back.

Freetrade requires borrowers to provide high-quality government bonds for the duration of the loan, and checks daily that the collateral is at least equal to the value of shares on loan¹. Its terms describe the same arrangement in more detail: collateral of cash or assets held for the customer is adjusted daily to make sure it is at least equal to the value of the lent shares, as required by the FCA Rules, and the customer has beneficial ownership of it but cannot trade with it².

Two things follow. First, the quality of the borrower matters less than the quality of the collateral, because the collateral is what stands behind the loan if the borrower fails. Second, the collateral is not yours to use: you have beneficial ownership, but you cannot trade with it while it is posted².

The FCA Rules sit behind the daily adjustment requirement². That is a regulatory obligation on the firm, not a guarantee that the collateral will always be sufficient in a fast market, and it is not the same thing as compensation if something goes wrong.

What you give up: voting rights and manufactured dividends

The income is the visible part of share lending. The rights you give up are the part that is easy to miss.

Freetrade states that if your shares are on loan, it may not be possible to vote if the opportunity arises¹. Its terms say the same: you may not be able to exercise proxy voting rights in relation to your lent shares, though Freetrade will take reasonable steps to return them on request². If you hold shares partly for the vote, or you care about a particular resolution, that is a real cost. Our page on dividends, corporate actions and voting when you invest through a platform covers how voting works in practice.

Dividends are the second thing that changes. Freetrade states that if shares you own are on loan and a dividend is paid, you may receive this as a manufactured dividend, and that it will be the same amount¹. The amount is the same; the tax treatment may not be. Freetrade states that depending on your circumstances this may be subject to different tax treatment, with the specific circumstances set out in the Income Tax 2007 legislation¹. That is a pointer to the legislation rather than an answer, and it is the reason to ask your platform or a tax adviser rather than assume the payment is taxed like an ordinary dividend.

For comparison, fractional shares are taxed in the same way as any other US stocks, for both gains and dividends⁹. That is a different arrangement with a different tax answer, and it shows that the treatment follows the structure of the holding, not the fact that a platform is involved.

Where FSCS protection fits if a platform or borrower fails

The Financial Services Compensation Scheme covers a range of financial products if a UK-authorised financial firm fails, including deposits, insurance, investments, pensions and mortgage advice⁴. Whether it covers a share lending arrangement is a different question, and the answer depends on what failed and how the money was held.

The scheme's own guidance on savings marketplaces, cash platforms and deposits aggregators is instructive. If an aggregator deposited your money with a regulated bank that then fails, it is likely that FSCS will protect it¹⁰. But FSCS does not cover cases where the payments firm itself fails¹¹. In other words, look-through protection can apply to the underlying firm, and it does not extend to the intermediary.

There are also clear exclusions that show how the scheme draws its lines. Credit insurance claims are not eligible for FSCS protection¹². FSCS does not protect money that a debtor pays under an individual voluntary arrangement arranged by insolvency partners, which are not regulated by the FCA, or debt advice¹². Employers' liability claims are covered at 100%¹³. The pattern is that FSCS covers specified products and specified activities, and it does not cover everything a firm does.

For share lending specifically, the protection described in the platform's own terms is the collateral arrangement, not the compensation scheme². If you want to check whether a particular holding or account is covered, the FSCS publishes a checker for that purpose¹⁰. Our pages on what happens if an investment platform fails and using the FSCS Investment Protection Checker go through the process.