What you need to know about investing in a Scotch whisky cask

A broker's role is to purchase casks directly from a brand owner and subsequently sell those casks to a buyer-client; or introduce buyer-clients to a distillery that wishes to sell a specific cask.

It is worth emphasising that the majority of whisky brokers are reputable businesses.

Prior to undertaking due diligence on the proposed cask, you should investigate your potential broker. Company information, including accounts filed and directors' details are all publicly accessible on Companies House.

A reputable intermediary will hold strong relationships with brand owners, acquired through years of working in the sector and developing relationships with those distilleries.

Each cask should be capable of being identified by reference to a unique cask number linked to the warehouse. Note that Scotch whisky casks can only be held in a bonded warehouse in Scotland and the HMRC maintains records of approved warehouses. Although this list is not publicly accessible, the Bonded Warehouse Keepers Association provides a list of members on its website.

A delivery order remains the standard method of transferring legal title in the Scottish whisky cask industry. This is distinct to the often-cited “certificate of ownership”, which often accompanies cask purchase agreements, but is not the same as a delivery order. Ultimately, the transfer of ownership requires acknowledgement by a warehouse of a buyer's title to the cask. Some warehouses may accept alternative documents other than a delivery order to evidence the transfer of title. For that reason, proactive warehouse communication is of the utmost importance to evidence a buyer's title.

Often a contract of sale (or cask purchase agreement) will be signed to govern the sale and purchase process. This is a helpful document that should set out the specifics of the sale and should include:

• the purchase fee;
  
• a full description of the whisky with reference to the distillery, age and year of distillation;
  
• a description of the cask type and volume;
  
• details on any resale restrictions; i.e. future bottling or exclusion of 'naming rights' to the whisky;
  
• confirmation on ongoing warehousing and insurance costs – and whether those are included in the purchase fee; and
  
• details of any post-sales service offered by the cask broker; i.e. periodic samples and regauging.

In particular, buyers who purchase a rare and premium cask should confirm that the warehouse insurance coverage will be sufficient to cover the cask value. Specialist insurance coverage should be considered here.

Whisky casks are classified as excise goods and are subject to duty suspension if held in a bonded warehouse. Casks can be traded freely in a bonded warehouse and owners of duty-suspended casks held in a warehouse may sell their stock in duty suspension at any time.

However, once a cask is taken out of a bonded warehouse, the cask is no longer treated as duty suspended (except when transferring it to another bonded warehouse facility).

So, if you decide that you'd like to have the cask contents bottled at a future date, you need to bear in mind the additional duty cost, plus bottling costs too.

Note that the Scotch Whisky Regulations 2009 prescribe very specific requirements on the maturation, export and labelling requirements for ‘Scotch whisky’. For instance, it cannot be exported from Scotland, other than in a bottle labelled for retail sale.

It's also worth being aware of any restrictions that apply to the future bottling of a cask. Certain distilleries enforce 'naming rights,' that prevent a future bottler from referencing the distillery of origin. This may impact future cask valuation. For instance, a cask owner may be restricted from referencing the distillery in which the whisky originates and can include reference only to the distillery location; i.e. Speyside. These are issues that should be clarified during the purchase process and when corresponding on the cask sale agreement.

Whether you want to bottle the contents of your cask, or resell the cask, a reputable broker should be able to provide flexibility to create the best exit structure for your investment.

While the Scotch Whisky Association is not responsible for the regulation of casks that are purchased privately, it has recently published updated guidance explaining the cask purchase process and the importance of buyer due diligence.

Crucially, the SWA advises that:

"any investment in a cask made by an individual with a view to selling it on at a profit must be made on the basis of their personal assessment of the risk and the value of the investment to them."

If you purchase a cask and subsequently discover that your broker has entered insolvency, there are specific steps and actions to take, to ensure that your interests remain protected.

If you have undertaken the above advice then you will have comfort that the cask is in your name, is held at a bonded warehouse and the Warehousekeepers has recorded your name against that cask. However, the following actions should help provide comfort.

a. Gather relevant paperwork and contact the warehouse.

Contact the warehouse to confirm that a cask remains under bond in your name. That correspondence should include your full name and contact information, together with all relevant cask paperwork. Namely: cask number; distillery; cask description; purchase date and cost.

Copies of all relevant paperwork should also be provided such as purchase agreement(s), invoices, delivery order (if available) and ownership certificate(s).

Writing to the warehouse holds a dual purpose here. It will hopefully provide comfort that the cask remains under bond and is registered in your name. However, if the warehouse cannot provide that confirmation, it fleshes out a potential issue straight away and you can then review your legal options. For instance, if the warehouse has no record of your name against a cask, this may indicate that the cask is still owned by the company that entered insolvency.

b. Write to the appointed insolvency practitioner.

This is an important step to register your claim, which notifies the insolvency practitioner that you hold title to an asset previously managed by the insolvent brokerage company. The contact information of the appointed insolvency practitioner will be publicly available, and the communication should be brief and factual.

Essential information to include will reflect the information disclosed to the warehouse such as: your contact information, the name of the broker, date of the cask(s) purchased and all documentation relevant to the cask purchase.

Investing in a whisky cask is like any other investment. Do your homework, ask the right questions and speak to trusted experts before making your decision.