The ObserverInvestments This article is more than 10 months oldLiquid gold? Here’s the sobering truth about investing in whisky
This article is more than 10 months oldBuying casks in the hope they increase in value sounds attractive, but industry experts warn of pitfalls
At first glance, it’s an attractive prospect for young investors: buy a cask of whisky and enjoy double-digit returns in the process. Ads for schemes to buy some of Scotland’s finest are constant features on social media – but the perils and pitfalls are not.
Young investors are increasingly being targeted on Instagram with schemes to buy their own whisky casks, but the unregulated area has become awash with misunderstanding, misconception and occasionally fraud. “It leaves room for unscrupulous people to take advantage. Some may offer what they claim to be rare and expensive whisky but is in fact nothing of the sort,” says Sarah Coles at investment platform Hargreaves Lansdown.
“Others will claim to be able to offer guaranteed returns in order to get people to part with their cash, but you can never guarantee a sale price upfront. Some will even be offering you the chance to buy casks that don’t exist.”
The offer
With the growth of alternative investments, such as art or fine wine, has come fresh interest in buying whisky casks: barrels of different sizes, which typically start at between £2,500 and £5,000. The simple idea is that the cask is held in storage for what can be decades, by which time it has matured into something that will have much greater value when it is ready to be bottled.
The companies that have popped up to help people invest their money are quick to point out the successes – such as when a cask of 1988 Macallan was sold for £1m at auction, having originally been bought for just £5,000.
What they don’t often highlight are the problems. Last year a British man was arrested by the FBI in the US in connection with an alleged whisky cask investment scam.
Theodora Lee Joseph of Finimize, a financial analysis company, says the growth in alternative investments, such as whisky, is a reaction to disappointing returns for some investors from the stock market at a time of high interest rates, and because younger investors are more likely to put money into schemes they have seen on social media. She says: “The trouble is, the majority of them may not be experienced investors who own a well-rounded portfolio, which makes whisky cask investing much riskier.”
The claims
Companies that claim very healthy returns are giving “dubious at best” promises, says Richard Woodard of The Whisky World, an online drinks retailer. “They’re often based on historical figures that date back to a time when whisky was an undervalued commodity – so don’t be fooled by the seemingly astronomical potential returns, and remember that nothing is guaranteed.”
The final value of the whisky is also dependent on what it will be worth when it is ready for sale – which could be 20 or 30 years into the future.
Coles says whether or not people make money is dependent on the standard of the whisky when it is ready for sale. “It doesn’t always go up in value, so there are never any guarantees. It depends on you knowing enough to make the right decision about what to invest in, and then for you to be lucky.”
The fraudsters
With a lack of regulation comes the potential for fraud, sometimes in the most simple ways. Woodard says: “A whisky cask is essentially an open container – it has a bung in it which is easily removed and replaced – so it would be relatively simple for crooks to top up the casks with inferior liquid, or to replace that liquid altogether.”
Mark Littler, a Cheshire-based whisky consultant, says establishing the ownership of a whisky cask is vital to ensure that the investor can prove they own it. The standard in the industry is for a delivery order to be signed by the buyer and the seller of the cask, and then acknowledged by the warehouse where it is stored.
He says: “If you have received a certificate of ownership, a deed of title, or anything that isn’t a signed document acknowledged by the warehouse, then chances are that you do not own your cask at the warehouse level. If you don’t own your cask, you cannot verify its existence with the warehouse, and you do not have full control of your asset and therefore your money.”
Investors also need to be aware that bottling a cask of whisky brings extra costs, which greatly reduce how much the investor gets back, Littler says. “What people will often do is get a 250 litre cask and figure out how many bottles are in it, and divide the purchase price by the number of bottles, and you’ll get an obscenely cheap price per bottle,” he says.
“But that removes every single bit of tax and VAT and duty that comes into the equation. You know, you’re looking at 20% VAT on the purchase price of the cask, duty at £28.74 per litre of alcohol, plus VAT … so tax on a tax. You’re looking at bottling costs, labelling costs, design of the carton, box costs, distribution margins, retail margins, wholesaler margins,” he says.
“The first thing might be £20, and when you compare it to the price of the bottle in the shop, you see £40 and think ‘that’s good’. But when you start putting all the taxes into it, it might be coming out at £60 or £70, and you’ve not even got the trademarks to sell the whisky.”
If there is a return to be made, it will not usually be made quickly. Littler says casks should be seen as a minimum 10-year investment.
The rules
London Cask Traders, a whisky investment company that advertises on social media, says that even though there is no Financial Conduct Authority regulation of the buying and selling of casks, there is a certain level of regulation and compliance, as HM Revenue and Customs requires firms to hold a “warehouse keepers and owners of warehoused goods regulations” (WOWGR) licence. This allows the holder to legally buy, sell and store goods in HMRC-bonded warehouses.
“HMRC undertakes extensive checks prior to issuing revenue traders with these licences, which include director and shareholder background checks, business plans, letters of intent from suppliers and potential customers,” says Oliver Court from London Cask Traders.
“We always urge clients to only deal with whisky brokerages which hold the valid WOWGR certification.”
Court says potential investors should contact other brokerages to do price comparisons, invest in prominent distilleries and have all relevant documents.
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