Fine wine and whisky

The investor base for fine wine and whisky has grown considerably in recent years, no doubt thanks, in part, to growing markets in previously unreached corners of the world, with many not just buying for investment but for their personal consumption too. Right now, the global whisky market is projected to grow to USD127 billion by 2028, while the global wine market is set to reach USD423.59 billion in 2028.

While the latest Knight Frank Wealth Report revealed that price tags on rare whiskies fell last year, it didn’t stop a bottle of 60-year-old Macallan whisky from fetching a remarkable USD2.7 million at auction in November 2023. Fine wine prices have also been on the rise, albeit stalling in the last couple of years. However, as is often the case where high-priced luxury items are concerned, the counterfeit market has also boomed. Whether at auction, online or in-store, buyers and sellers of whisky and wine must act cautiously, carrying out extensive research on provenance, vineyards, tax benefits and everything in between, before making any serious commitments.

Both the fine wine and rare spirit markets have been in a downturn over the last year. Investor confidence has been damaged by economic and geopolitical issues in many regions, with money also flowing to higher-yielding safe assets. However, for both the fine wine and spirit markets, this could be seen as a breather to the extraordinary rises in asset prices that took place over the last five years.

Lewis Chester DipWSET and Sasha Lushnikov, Co-founders, Liquid Icons and The Golden Vines® Awards

Wine

In the past, investing in wine was often a simple affair. Buyers acquired more wine than they intended to consume and sold the surplus to fund further purchases. Today, investing in wine is a global phenomenon and big business, with exalted vintages and producers commanding ever-increasing prices, and the world of investment wines broadening well beyond the traditional strongholds of Bordeaux and Burgundy.

Over the last two decades, the fine wine market has been increasingly driven by demand from East Asia, most notably China. Here, greater prosperity has fuelled the demand for fine wine not only for investment purposes, but for drinking too. Unsurprisingly, greater purchasing and consumption of a finite commodity with a limited supply has driven up prices, particularly within Asia.

The existence of the Liv-ex indices, especially the Liv-ex Fine Wine 100 – aka the ‘FTSE 100’ for fine wine – is testament to the importance and fascination wine holds within the investor market. Equally, the fluctuations of the Liv-ex show that wine can be an uncertain investment at times.

In the last decade, prices were generally on the rise, owing in no small part to a long run of highly rated and intensely promoted vintages in the key regions of Burgundy and Bordeaux (and in a general sense, worldwide). However, the Liv-ex Fine Wine 100 has seen a steady decline since peaking in mid-2022, with some attributing this to increased economic uncertainty, especially in China.

Fine wine: when issues arise

Counterfeits

As the fine wine industry continues to grow, so does attempted fraud, and the industry has repeatedly found itself at the centre of high-profile counterfeit cases. While this is far from new, with complaints of fraud and adulteration recorded from the time of the Roman Empire, there have been a number of recent instances where forged versions of some of the most famous, highly esteemed wines have been sold.

Perpetrators mix lower calibre wines, or affix labels of expensive fine wines to cheaper bottles, to create counterfeits which have duped a number of unsuspecting buyers out of large sums of money.

Counterfeiters appear to be targeting the upper end of the market, where high profits are an attractive prospect. Buyers of particularly rare or prestigious wines therefore need to exercise extreme caution and pay close attention to provenance, labels, wine colour, corks and even the type of glass used for signs of forgery. In an attempt to help prevent fraud, a self-regulatory body called the Wine Investment Association (WIA) was established in the UK in 2012.

Wine investment companies

The establishment of the WIA was also a reaction to the emergence of disreputable companies specialising in wine investment. Given the lack of regulation in this area, there are many pitfalls and areas of concern for consumers.

Here are a few tips you should consider before choosing an investment company:

Carry out extensive research before making any commitments. Online research will unearth reviews from past clients but treat the context of any reviews with caution. Ask yourself: who is giving the review, and can you trust it? Checks on a company’s registration number and physical address are a must.

Take additional care if you’re being offered a wine or investment product with a limited track record, as you’ll have less information available to judge if the proposed pricing is reasonable, the reviews are credible, and whether the investment company’s sales pitch is meaningful, irresponsible or even fraudulent.

If a company is storing wine on your behalf, it should be in an approved bonded warehouse. Make the necessary enquiries to ensure this is the case, or better yet, ask to visit the premises. Also, check that the company is fully insured and has the appropriate cover in the event of any damage.

In most circumstances, records should exist showing where an investment wine has been stored since it was released by the winemaker (noting that this may be some years after the vintage for certain wines). A lack of such data increases the risk that the wine wasn’t properly stored, or isn’t genuine, and generally affects its value.

Be wary of those who promise a guaranteed return; as with any investment, prices can go down as well as up.

Extra care should be taken when buying wine ‘en primeur’ (wine bought before it is bottled), as this can be riskier than buying physical stock. Be clear when delivery of wine purchased in this way is due and keep in contact with the seller to make sure this is adhered to.

Avoid companies that employ bullish sales tactics. You should also shun unsolicited calls, which can be illegal and should always be treated as suspicious.

Reputable companies should provide regular reporting on the value of your stock using Liv-ex, the only independent authority on price.

Be vigilant against conflicts of interest – fund managers and advisers should have investors’ interests at the heart of their operation.

A profitable asset?

Despite price uncertainty and the risk of counterfeits, many contend that fine wine remains lucrative for any investor’s portfolio. For the wine connoisseur, or someone simply appreciative of wine who can weather the occasionally turbulent conditions of the market, fine wine presents an enticing investment and can have certain advantages from a tax perspective.

Most fine wine is bought ‘in bond’, where excise duty and VAT are deferred until delivery. Wine ‘in bond’ in the UK is stored in warehouses approved by HM Revenue & Customs (HMRC). Currently, duty on wine is based on the amount of alcohol in the product (at the time of writing this would amount to GBP2.67 on a standard-size bottle of 12.5% alcohol wine). VAT is charged at 20% and is applied after excise duty.

If wine remains ‘in bond’ and is then sold on, duty and VAT will not need to be paid. Savings can thus be garnered in this way. If you decide to take delivery of your wine and remove it from ‘bond’, excise duty and VAT will be payable on your original purchase price and not the current value (even if the value has risen significantly); this is obviously on a case-by-case basis as it is removed from bond, either for private sale or perhaps for personal consumption.

Wine ‘in bond’ is a draw for both investment buyers and those interested in drinking the wine in the future. It’s easier to ascertain the history and provenance of wine ‘in bond’ and purchasing this way offers greater protection against counterfeits. This method also ensures that bottles have been stored correctly in temperature-controlled conditions. From an inheritance tax point of view, you must bear in mind that wine held ‘in bond’ is still seen as part of your estate.

Capital gains tax

Any increase in the value of fine wine may be exempt from capital gains tax (CGT) if the wine is classed as a ‘wasting asset’ – that is, if its ‘predictable life’ does not exceed 50 years. The life of a wine will be measured from the point of purchase.

For example, if you purchase a Bordeaux from 1975 today, the chances of it lasting more than 50 additional years will be remote. It’s far more likely that a fine wine, such as the acclaimed Château Pétrus or Domaine de la Romanée-Conti, from an excellent vintage bought young or ‘en primeur’ will be considered to have a predictable life at purchase that exceeds 50 years, meaning any increase in value may be subject to CGT.

Regardless of the type of wine (or its predictable life), any bottle sold for less than GBP6,000 also remains exempt from CGT. However, collective sales to the same individual may be assessed as a ‘set’ if the wine is thought to be complementary (ie a case of wine from the same vineyard in the same year or a ‘vertical’ of the same wine in different vintages), in which case the GBP6,000 exception applies to the set rather than each bottle.

Determining whether a wine will last longer than 50 years can be a complicated matter, and depends on factors such as quality, type, vintage and storage. In terms of the characteristics of the wine itself, wines with a high residual sugar content (such as Sauternes, Tokaji and many Rieslings), usually last longer, as do wines with higher acidity levels.

HMRC takes the view that fortified wines (which have had spirits added to them as part of the winemaking process) such as Port, Sherry and Madeira generally have a predictable life of longer than 50 years, so they are not wasting assets. If there is any doubt, it’s advisable to speak to an experienced wine merchant and, if necessary, obtain a written opinion.

In 2022, Islay-based Scotch brand Ardberg announced the sale of an individual cask of single malt, Cask No. 3, for

GBP16 million

via a private sale, making it the most expensive ever sold based on publicly available information.

Source: foodandwine.com/news/ardbeg-1975-whisky-cask-sale-record-19-million

Whisky

Whisky (alternatively whiskey, particularly when discussing spirits from Ireland and the US) as an investable asset is a much more recent phenomenon than wine, having begun in the late 20th century and gathered strength since.

Geographically, whisky (at least for the global market) is overwhelmingly a product of a few countries. Scotland and the US together make up most of the market, and Japan, Ireland and Canada are also meaningful producers. While India’s production is significant, comparatively little is exported given the large domestic market.

Returns on whisky investment have been historically healthy, but without an index equivalent to Liv-ex and with significantly lower amounts of public sale data, attempts to quantify this are not especially reliable. That said, The Knight Frank Luxury Investment Index for 2023 put the ten-year return on rare whisky at 280%, nearly double that of fine wine. Of course, this is still a developing market, so it’s difficult to know how much the run-up in prices is attributable to investors and connoisseurs discovering the market (and therefore not necessarily repeatable), and how much is rooted in the same market fundamentals that move prices in wine and other mature trophy asset markets.

Bottles

Investment whisky is, in reality, two substantially different assets. Unlike wine, where maturation continues after bottling, spirits generally don’t alter once bottled, provided the bottle remains sealed. This means that whisky maturation occurs wholly in cask (ie in barrels – which impart the vast majority of the flavour, although differences between distilleries remain key) and so whisky almost always remains ‘in wood’ longer than wine.

This process, and the inherent large amounts of a distiller’s capital tied up in stocks that can’t yet be sold at retail, has led to a market for casks of whisky that haven’t completed maturation, which exists alongside the market for bottles of the finished product.

The investment market for bottles of whisky is broadly analogous to that for wine (albeit smaller and less sophisticated). A small number of super-premium releases from certain producers (Macallan probably the best known for Scotch whisky, and Pappy Van Winkle for bourbon whiskey in the US) dominate the resale market by value, but the practically immortal nature of bottled whisky means there is also a market for historic bottlings of less prestigious liquid.

Whiskies from distilleries since closed (so-called ‘silent distilleries’) also transact at top-end values, and in some circles of connoisseurs are more prestigious – being genuine ‘liquid history’. Port Ellen on Islay is a classic example – it closed in 1984 but was recently revived by Diageo, who have installed new stills in some style.

Many of the cautions outlined earlier for investors in wine apply equally to whisky. While newer releases are more likely to have a record of custody to mitigate risks to some extent, the high per-bottle value and reduced need to falsify the age of bottles increases the incentive and lowers the difficulty for counterfeiters. A whisky that has been in bottle for any period (particularly one that at any time sat outside a super-premium price bracket) is highly unlikely to have an unbroken record of provenance since the distillery, therefore examination by a specialist, or sourcing from a supplier with an excellent reputation, is highly advisable if you’re considering investing in high-value whisky.

The CGT treatment of bottles of spirits is less advantageous than wine, as there’s little prospect of them being deemed exempt as a ‘wasting asset’ given sealed bottles don’t materially deteriorate. On the other hand, bottles of whisky tend to trade as single bottles rather than cases or sets, so the GBP6,000 exception is less likely to be exceeded despite the generally higher per-bottle values of whisky.

Casks

The market for casks of still-maturing whisky has significantly different dynamics, and significantly different risks, than that for finished bottles.

Casks are almost invariably bought, sold and kept ‘in bond’ until bottled (or shortly before that). A true investment buyer (rather than someone looking for a non-financial return) will generally sell casks to a specialist bottler (which buys casks at or near maturity to reduce the capital required for their trade, providing a return to the investor for having tied up their capital). This means there’s rarely any uncertainty as to the authenticity and provenance of the liquid and it also simplifies the tax position.

On the flip side, the quality of whisky from any individual cask is unpredictable (almost all commercially retailed single malt Scotch whiskies are a blend of several casks to ensure the required consistency in flavour over time), so a purchaser of a cask takes the risk of it not being especially desired by bottlers at maturity.

There is also an inevitable – but somewhat unpredictable – loss to evaporation (dubbed the so-called ‘angels’ share’) over time. This means the number of bottles expected to be produced from a cask of a specific size drops the longer the liquid remains in the cask (although most whisky is diluted from its ‘cask strength’ at bottling prior to retail sale).

Whisky: when issues arise

Investors in the cask whisky market should also be aware that the investment companies in this sector generally have a much thinner track record than their equivalents within the wine trade (and as gatekeepers to suitable bonded warehouses and connections with desirable distilleries, are less able to be replaced or dispensed with, even for experienced investors). This can make it harder to distinguish counterfeits from the genuine article.

It’s crucial that you verify that each barrel of whisky you have purchased actually exists, legally belongs to you and is properly stored. Bullish sales tactics, irresponsible promises of returns and conflicts of interest are prevalent, as is often the case in markets for unique (or quasi-unique) trophy assets. Membership in one of the whisky societies with longevity in the market can give buyers access to products where these issues are less of a concern.

Very few investors will realise a cash return on their investment in cask whisky other than where it’s sold while it’s ‘in bond’. Cask whisky (unlike bottled whisky) is, however, generally considered to be a ‘wasting asset’ and so exempt from CGT due to the evaporation which means whisky in casks is usually considered to have a predictable life of less than 50 years.

In some circumstances, it’s possible that HMRC would try to argue that the profits from cask whisky were trading profits subject to income tax rather than an investment return subject to CGT, so advice should be sought. If whisky is removed from cask and bottled privately, excise duty and VAT on the purchase price would be payable as outlined above for wine. Slange var!

Asset performance

The Liv-ex Fine Wine 100 Index saw a 14.1% decline in 2023 but is up 285.5% since its inception 20 years ago and remains up 15.5% over a five-year period. Meanwhile, The Knight Frank Luxury Investment Index 2023 showed price tags on rare whisky fell 9% in the previous 12 months but were up 280% over a ten-year period.

Key points to remember

Counterfeit cases are on the rise

For wine, pay close attention to provenance, labels, wine colour and corks for signs of forgery. Check the WIA for guides to buying. Whisky investment companies are harder to investigate. Ensure you verify that each barrel of whisky you have purchased actually exists, legally belongs to you and is properly stored.

When purchasing a high-value rare whisky, we recommend that it’s examined prior to purchase by a specialist or sourced from a highly regarded supplier.

If selling fine wine on, consider buying ‘in-bond’ to make VAT savings and understand when purchasing a fine wine or rare whisky, for investment, whether you’re likely to be liable for CGT on any increase in value.