If you are wanting to build your finances and secure your future, diversification is one of the keys to success. While traditional assets like stocks and bonds have long dominated portfolios, alternative investments have gained more popularity in recent years. Whisky, a well-loved spirit with a rich history, has emerged as a unique and profitable investment avenue in the past decade.
A tangible, consumable asset, that’s also culturally significant, Scotch whisky offers numerous benefits that make it an enticing option for investors. In this article, we delve into the benefits that come with whisky investment, ranging from portfolio diversification and attractive returns, to tax-efficiency and the supply and demand nature of the market. At Hackstons, transparency and authenticity are among our core values, and so we also share some of the key risks to consider as well as some ways to mitigate these risks.
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THE RISKS to CONSIDER
Scams
As with any asset ownership market, and in fact many markets outside of asset ownership, whisky is not immune to fraudulent activities. Unfortunately, in any market, unscrupulous individuals may attempt to sell counterfeit or non-existent bottles or casks, exploiting the enthusiasm and trust of potential investors. As such, it is essential to exercise caution when dealing with unfamiliar sellers or investment opportunities.
When looking for companies that can facilitate whisky ownership, we recommend being as thorough as possible with your due diligence so that you can be confident that you’re working with a trusted and established company, helping to mitigate the risk of falling victim to scams.
Value of cask/whisky diminishing
While the whisky market has shown significant growth, it is essential to recognise that the value or returns of each whisky cask is never guaranteed. Factors such as brand reputation, rarity, age, the type of finish and demand all influence the potential for value appreciation. Economic conditions and changing consumer preferences can also impact the market dynamics, leading to fluctuations in whisky values. With this being said, as a general rule of thumb, whisky which is held for long periods of time, that also does not fall below a minimum ABV of 40%, will always have a value and usually more than what was originally paid.
It is always worth carrying out thorough research and asking the right questions of any advisors that you speak with, which will mean that you will have a better understanding of which cask suits your whisky ownership ambitions.
Damage or theft
Physical assets, such as whisky casks or bottles, are of course more susceptible to damage or theft than more nebulous assets such as stocks and shares. Fire, water damage, or improper storage conditions can lead to a significant loss of investment value. Additionally, theft poses a risk, as rare and valuable whiskies can be attractive targets for criminals.
While all whisky casks need to be stored in a HMRC-bonded warehouse, the insurance for these facilities usually only protects the structure of the building itself, and not its contents. As such, If you’re looking to own whisky, you should ensure proper insurance coverage for your casks. At Hackstons, We offer an extensive and bespoke insurance policy to all our cask owners. Our policy covers fire, theft and damage and your cask is insured to its current value, rather than the purchase price, providing you with top of the range capital security.
Whisky ABV dropping below the accepted standard
Whisky ageing involves the evaporation of alcohol known as the "angel's share." Over time, the ABV (alcohol by volume) of the spirit can drop below the required minimum for classification as whisky. While some degree of ABV reduction is expected (around 2% each year) and contributes to the complexity of aged whisky, excessive evaporation can diminish the product's quality and value.
Once Scotch drops below 40% ABV, it is no longer considered Scotch whisky, and so you should stay informed about the ABV levels of your cask to ensure that it doesn’t drop below 40% ABV. We recommend checking the ABV level of your cask every 3-5 years for younger casks, and every 2-3 years for casks that are older. This is known as regauging your cask, and is a service that clients can request from us at Hackstons.
Having covered the potential risks to consider around whisky ownership, let’s now delve into the multiple benefits that come with owning a tangible, liquid asset such as whisky.
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THE BENEFITS
Portfolio diversification
In a time where stocks, shares and crypto offer more unpredictable routes to investment, it is a great time to consider diversifying your portfolio. Owning whisky offers one such avenue. Tangible assets such as whisky, offer a different route to investing, and operate independently from the stock market, making it an attractive alternative investment for individuals looking for long term growth.
By allocating a portion of your investment portfolio to whisky, you can reduce the risk associated with market volatility and potentially enhance overall returns. The low correlation between whisky and other asset classes means that it can act as a hedge during economic downturns, thus more effectively safeguarding your wealth.
Returns
Whisky investment has demonstrated a great track record of delivering attractive returns over the years. Scotch whisky in particular has shown steady appreciation in value, outperforming many traditional investments. Limited production runs, rarity of aged single malt casks, and growing demand contribute to the increasing value of premium whiskies. Moreover, the nature of Scotch whisky is that over time it matures, and in turn, increases in value.
With careful selection and knowledge of the market, investors have the potential to enjoy significant capital appreciation, making whisky investment an alluring option for those seeking high returns. While it’s never possible to predict exactly what particular bottles and casks will be worth, it only takes a brief search to find a number of examples of whisky casks reaching lofty heights in terms of returns. The ‘forgotten’ Macallan cask, bought for £5000 in 1988 which sold for $1.3m dollars last year is perhaps one of the most impressive examples of this. While this is not typical for many new owners entering the market, this is just one example of what can happen when you allow a cask to become rare.
Tax-efficiency
Another advantage of buying casks of whisky is its potential for tax efficiency. In many countries, including Scotland, whisky is considered a wasting asset. As per the HMRC definition this is ‘an asset with a predictable life of over 50 years’. When whisky is stored in oak barrels there is always evaporation known as ‘The Angels share’, which accounts for around 2% of the entire whisky cask volume each year due to the oak cask and environment in which the barrels are stored. For this reason, for UK tax purposes the whisky in the casks is considered to have a life of under 50 years and therefore is exempt from Capital Gains Tax under the wasting asset rules. As a result, this favourable tax treatment can enhance your returns.
Tangible and consumable
Investing in whisky offers the unique advantage of owning a tangible and consumable asset. Unlike stocks, shares or bonds that exist only on paper, and are much more nebulous in nature, whisky is a physical item that much like your own home can be held, admired, and enjoyed. When you purchase a whisky cask, you own the title, it is held in a HMRC-bonded warehouse, and in some cases you can even go and visit your cask at the distillery. Once casks are bottled, each bottle represents the craftsmanship of skilled distillers using age-old techniques, and whisky enthusiasts take great pleasure in collecting and tasting these different expressions.
Furthermore, even if the market fluctuates, the inherent value of whisky remains intact, as it can always be consumed and appreciated. This dual nature of whisky as an investment and a consumable luxury makes it an appealing choice for those who derive joy from both collecting and savouring the spirit.
Maturation
Another unique aspect of whisky lies in the maturation process. As we briefly touched on earlier, unlike other traditional investments and tangible assets, whisky matures over time, enhancing its quality and value. As whisky ages in oak casks, it undergoes a transformation, in which it acquires new, complex flavours and aromas that appeal to connoisseurs and collectors alike.
This maturation process adds an extra dimension of scarcity, as each bottle effectively becomes a time capsule capturing the essence of its distillery and production year. Unlike other liquid assets, whisky stops maturing once bottled so collectors and drinkers alike will not have to anticipate or guess what the whisky will taste like if the bottle is not opened and consumed immediately. Investors can leverage this aspect to their advantage, benefitting from the increased desirability and value of well-aged whiskies.
Provenance
When considering whisky investment, the concept of provenance plays a significant role.
Provenance essentially refers to the traceability and authenticity of a bottle, including its distillery, production methods, and age. Whiskies with strong provenance, such as limited editions from renowned distilleries, or even ghost distilleries (those that no longer are in operation) tend to command higher prices in the market.
By purchasing whiskies with exceptional provenance, investors can capitalise on the prestige and reputation of specific distilleries, attracting future buyers who value the historical and cultural significance associated with these bottles. Provenance adds an extra layer of value and desirability to both whisky investment and collecting.
Growing global demand
It is no secret that Scotch whisky continues to enjoy a growing global demand, fuelled by a rise of enthusiasts and collectors worldwide. You only need to look at the most recent export figures from the Scotch Whisky Association (SWA) to get a picture of just how much this demand is growing. Emerging markets across the Asia-Pacific region, as well as India - who topped 2022’s list for the amount of bottles of Scotch whisky exported to the country - have developed a strong appetite for premium whiskies, contributing significantly to the surge in demand.
An expanding middle class in these regions, coupled with a newfound appreciation for luxury goods, has led to a flourishing whisky culture. This growing global demand provides a favourable market environment for whisky owners, and the market for people holding casks is incredibly small in comparison to those that drink whisky globally, so we believe the secondary market will naturally grow.
Decreasing supply
At its core, whisky investment benefits from a fundamental supply-demand dynamic. As the demand for premium Scotch whiskies continues to rise globally, the industry faces a challenge in meeting this demand due to limited production capabilities. There is a finite number of casks, and due to the nature of Scotch whisky requiring at least three years of maturation, and the lengthy distillation process, producing high quality casks doesn’t happen overnight and accessing the casks that have growth potential is not easy.
In addition, changing consumer preferences and increasing costs of production contribute to the decreasing supply of aged and rare whiskies. This scarcity of supply puts upward pressure on prices, presenting a compelling opportunity for investors to capitalise on the rising value of limited-edition, discontinued and scarce Scotch whiskies.
So there you have it, the key benefits of investing in whisky. Whisky investment combines the allure of a well-loved and luxurious spirit with the potential for financial gains that are incredibly tax-efficient. Whether you are a seasoned investor or a whisky enthusiast looking to diversify both your passion and portfolio, exploring the world of Scotch whisky investment can be a rewarding endeavour. With its intrinsic value, scarcity, and global demand, the ‘liquid gold’ offers a captivating journey that intertwines history and craftsmanship, with financial opportunity.
If this article has piqued your interest in purchasing your own cask or you just want to find out a little more about it, just complete the form below to get in touch with one of our Luxury Asset Managers today!
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