THE sale of with profit endowment policies is big business. It is estimated that fewer than a third to a quarter of with profit endowments, whether stand alone of attached to mortgages ever last until maturity and most owners are forced to sell them within a few years of purchase so commonplace is early encashment that a whole industry has been built up around their resale. There are regular auctions of policies in London with buyers from all over the world bidding for the most potentially lucrative contracts.

For the policy holder, the advantage of selling their endowment on the open market instead of encashing it directly with the insurance company is that they are guaranteed to get a better price, depending on how many years the policy has left to run. The younger the policy holder and the longer the policy the better. Most contracts carry at least a 10 per cent premium sale price.

For buyers the advantage is that the best second hand endowments promise not only a guaranteed sum assured but annual bonuses and a potential financial bonus. The buyer's purchase price is covered and the long term return is virtually certain to beat most other investments, such as post office savings products, high yield deposits, etc. (These are the same reasons most ordinary people buy with profit policies.)

The one feature of second hand endowment purchase that has not been highlighted, according to Mr Aidan McLoughlin, a solicitor and insurance/tax adviser with the specialist brokers FEN (Financial Engineering Network), is the capital gains tax risk. He recently responded to an article which appeared in the Irish Broker magazine about the merits of second hand endowment policies.

In a letter to the magazine Mr McLoughlin states. "The proceeds of a life policy are generally exempt from Capital Gains Tax, and the only tax payable is accounted for at 27 per cent by the insurance company on the policyholder's behalf. He has no personal liability and doesn't have to return this investment on his tax return.

"CGT can arise however when the person making the disposal is not the original beneficiary/owner, and quoting directly from the CGT Act, acquires the rights or interests in the policy for consideration for money or money's worth. The new owner is now obliged to report to the Commissioners the purchase and disposal of the bond on their tax returns.

If the policy makes a profit, the new owner is liable for CGT at a rate of 40 per cent, Mr McLoughlin told Family Money. When you take into account the 27 per cent internal tax that has already been paid by the insurance company, the amount of tax paid on profits rises to over 50 per cent, he added.

Mr McLoughlin warns investors in second hand endowments that "there are no guarantees of returns with these policies", and when the potential tax liability is taken into account, they need to be considered with great care.