The risks and pitfalls of wine investment
The risks and pitfalls of wine investment
By Jim Budd
How to protect yourself against wine investment scams and similar scams.
Wine can be a worthwhile alternative investment providing you buy the right wines at the right price and the right time from a legitimate company. Unfortunately like a number of other alternative investments it attracts fraudsters.
This post concentrates on the pitfalls of wine investment and scams.
Avoiding being defrauded is actually very easy. All you need to do is to never accept a cold call. Certainly never take a cold call about investment. No legitimate investment company will cold call you. Instead an investment cold call is very likely to come from a young, mainly male, telesales person working to a script and based in a boiler room – high-pressure call centre pushing dubious investments.
The unsolicited caller, whose income will largely be on commission, will be only concerned about making a sale. He or she will not be interested in your particular needs or circumstances. It is also more than likely that the person calling will be following a script and may well know little or nothing about wine. The caller will intent on competing in a high pressured macho environment and on earning enough to increase their wardrobe of sharp suits and garage of flash cars.
Once someone agrees to buy from a cold calling investment firm they will be pestered to make further purchases aiming to persuade the ‘investor’ is to sink all their savings into wine.
Scam wine investment companies either invariably overcharge for their wines making unrealistic promises or, all too often, don’t even bother to buy the wine – just take your money. Unfortunately there have been many examples of scam investment companies who neglected to buy all or part of the wine their ‘investors’ ordered. These include The Bordeaux Wine Trading Company Ltd, Bordeaux UK Ltd, Bordeaux Fine Wine Ltd and The London Vines Ltd. All of these went bust or were closed in the public interest.
And the list just on and on ….. in June 2017 Noble Vintners Ltd with 58-year-old Kevin Eagling as the sole serving director went into liquidation with a deficiency to consumer creditors (ie investors) of just under £1.7 million. It is reasonable to assume that this is the amount of wine that Noble Vintners Ltd sold to its investor clients but failed to buy.
All investment wine should be stored in a bonded warehouse to avoid duty and VAT. These taxes are only payable when you take your wine out of bond.
Do make sure you have your own account quite separate from the company from whom you bought the wine. Having your own account gives you full control over your wine. Whereas if you have a client account within an umbrella account owned by a wine merchant they have control over your wine, so you need their permission to move your wine. In contrast they can move and, even, sell your wine without your permission or knowledge.
Naturally there are storage charges to consider. For example the annual charge for private individuals storing a case of wine at Vinothèque is £10.44 plus VAT and there is a minimum annual charge of £50 plus VAT.
The arrest, trial and imprisonment of Rudy Kurniawan as well as the work of Maureen Downey (Wine Fraud/ Chai Consulting) and others has highlighted the high number of fake fine wines in circulation.
If it is any comfort in over 20 years of covering drinks investment scams I have never come across scam artists selling fake wines to their victims. The reason is, I think, simple. It is much easier to overcharge your clients or simply not buy the wine. Making a convincing fake takes time and expertise. The sole possible exception was the Nobles Crus wine fund that listed many old wines including old vintages of Burgundy, bought from various sources including restaurants. Given the high incidence of fakes in collectable old wines it is reasonable to think the Nobles Crus Fund included some fakes. There is, however, no suggestion that Nobles Crus were knowing buying fakes.
Resistant to economic trends?
It is frequently claimed that wine prices are not affected by economic trends. Just a brief reflection is necessary to show that fine wine as a luxury good is, of course, affected by economic trends. Wine, however, tend to be less volatile than shares.
In boom times people feel more financially confident, so are more inclined to buy luxury goods like fine wine and prices are likely to rise. Whereas in times of financial crisis and economic depression people rein back their spending, even those who have managed to keep their jobs. Anyone made redundant will surely not be buying expensive wine.
Thus fine wine prices are very likely to fall during an economic slump. For instance, following the 1997 economic crisis that centred on Asia-Pacific fine wine prices fell and did not full recover until around 2005/2006 when the fine 2005 Bordeaux vintage showed that many fine wines were under-priced. This along with burgeoning interest and demand in China provoked a boom that lasted until 2011, when prices slumped and remained little changed until 2016.
The Liv-ex 1000 graph illustrates that wine prices fluctuate considerably.
Liquid but not necessarily a liquid asset
Ironically, although wine is liquid, it is not necessarily a liquid asset. Unlike shares wine is not an automatic sale – you have to find a buyer, which may not always be easy. This is likely to be especially true if a large number of people are trying to sell their wine at the same time, which may well be the case during an economic slump.
Free of Capital Gains Tax (CGT)
This is a very popular claim and one that has, too frequently, been made by legitimate companies as well as scam ones. Most wine is classified as a ‘wasting asset’ meaning that it does not have a life span of 50 years and so is free from CGT. However, there are clearly a number of fine wines – both unfortified and fortified that are certainly drinkable after 50 years. This includes for instance top unfortified wines from Bordeaux, Burgundy, some of the classic areas of Italy, German Rieslings, Loire Chenin Blanc as well as certain Australian wines – all before we get started on Port, Madeira, Sherry etc. After all the famous and still drinkable 1961 Bordeaux’s are now 56 years old and Cheval Blanc 1947 will very shortly be 70 years old.
Thus it is very likely that many wines bought as an investment will be liable for CGT when sold. There is, however, a further complication. The ‘50 year span’ starts from the time that the wine is purchased, so many wines bought en primeur will potentially be liable to CGT, whereas the same wine bought when it is considerably older may not be.
For example 1945 Mouton Rothschild bought in 1947 is liable for CGT as it is still drinkable over 70 years on. However, if you bought 1945 Mouton Rothschild now (2017) there is a good case that any profit made from reselling the 1945 should be CGT free as it is quite possible that by 2067 this wine will be undrinkable.
Wine counts as part of your estate. It is assessed at current value and not at its value when it was bought. The notion of a ‘wasting asset’ does not apply.
An unregulated investment – not covered by FCA (Financial Conduct Authority)
As wine is an alternative investment, like art, jewellery, veteran cars etc. it is not regulated by the FCA. This means that if things go wrong investors are not covered by the financial services compensation scheme. You are on your own.
Wine – a small part of an investment portfolio
Even when buying from legitimate wine merchants wine should only form part of your investment portfolio as you should always spread the risk.
Fraudsters have little fear of prosecution
The chances of fraudsters being prosecuted in the UK have always been low. Only a small number are actually arrested and brought to trial, although once in court there is a high possibility of them being judged guilty and receiving a prison sentence. Fraud investigations and the resulting trial are time consuming, usually complex and expensive. Recent cuts to the police and the Insolvency Service etc. make the chances of getting away with fraud even more favourable.
It is hardly surprising that investment fraud is a growth ‘industry’ and that the UK authorities just don’t have the numbers or the resources to deal with the number of complaints they receive. You have been warned!
You can always drink your investment….really!
Lazy journalists frequently finish their article on wine investment by saying that it all goes wrong you can always drink your investment. A fatuous comment if some scam company has persuaded you to sink all or a high proportion of your savings in wine.
Firstly this assumes that the company has actually bought your wine. Then there is the substantial bill in duty and vat to be paid in order to release your wine from the bonded warehouse. VAT will be charged at the price you paid, so if you overpaid for your wine this is another expensive wammy.
A final reminder ……. never accept a cold call.