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HMRC internal manual

Capital Gains Manual

Depreciatory intra-group dividends: Offshore sandwich device

The offshore sandwich device exploited the fact that, under the rules for CG group membership, see CG45141, a group includes indirect UK resident subsidiaries of a UK resident parent even if those subsidiaries are owned via a non-UK resident intermediate holding company. The device was therefore particularly attractive to groups with offshore connections which could readily set up the following kind of ‘sandwich’ structure:

UK parent



Offshore subsidiary



UK subsidiary


The device typically involved the following steps:

  1. P wishes to sell a subsidiary Q to a third party
  2. Q hives down its assets or trade at market value to a newly formed subsidiary, R
  3. R typically funds the purchase of the hived-down assets by a loan, possibly from another group company
  4. the hive-down creates reserves and cash in Q, out of which Q pays a dividend to P
  5. so far this follows the standard drain out dividend pattern, see CG46820, - P gets the value out of Q as a dividend - but the difference is that P does not now sell Q directly to a third party
  6. instead P sells Q in the first instance to an offshore company, O, within the same worldwide group
  7. the offshore company O then sells Q to the third party
  8. as part of the sale agreement, the third party purchaser will arrange for the repayment of R’s debt (see step (3) above).

Unless the residence of the offshore group company, O, was vulnerable to challenge, the only disposal relevant for CG purposes would be the transfer of Q to O, at step (6). The market value rule would apply to this transfer, but the market value of Q would of course have been substantially reduced by the dividend paid at step (4).

Before the FA99 amendments, in order to apply the value shifting legislation to the transfer of Q to O, we would have to show that the condition in Section 31(8) (the `asset severance test’) was satisfied. This required that, immediately after P had disposed of Q to the offshore company at step (6), the assets which were the subject of the asset transaction (the hived-down assets) must be owned by a company outside P’s capital gains group. It would be claimed that this condition was not met because at this point the assets which were the subject of the asset transaction were owned by R, which remained within P’s capital gains group at this point despite the transfer of Q to O.

Finance Act 2011 introduced a new Targeted Anti-Avoidance Rule for disposals of shares and securities by companies on or after 19 July 2011. See CG48500+.