What you need to know about the Scotch whisky cask purchase process

The cask purchase market

Whilst the majority of Scotch whisky is sold once bottled it has always been possible for consumers (or investors) to purchase whisky casks either for future personal use or as an investment vehicle. Casks can be bought at a young age once they have been set down for maturation and this stage ordinarily presents a reasonable market entry point for consumers. By contrast, rare and matured casks can be an appealing prospect for collectors or investors and as such, are likely to attract more significant valuations.

The increase in interest in cask sales is perhaps attributable to (or at least fuelled by) a wide range of investment reports indicating a rapid increase in cask valuations as well as reported sale figures disclosing vast sums for single casks of Scotch whisky. Indeed, the most recent Knight Frank Index records that the value of rare whisky has increased by 373% in the last ten years.

Duty suspension in bonded warehouses

Whisky casks are classified as excise goods and will be 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.

Once a cask is taken out of a bonded warehouse (other than for transfer to another bonded warehouse facility) then the cask is no longer treated as duty suspended. Following a cask purchase, if a buyer wishes to bottle their cask, excise duty will be triggered when the bottles are dispatched to the owner. The duty due is significant and will be based on the rate of duty applicable at that point - not when the cask was purchased. Thus the purchase price of the cask is only the initial outlay. Additional storage costs may apply – usually after a fixed period. Also, movement of the cask under bond is strictly controlled and can only be carried out by authorised operators, which will likely incur additional fees.

Record retention and transfer of legal title

Historically, the transfer the legal title to whisky casks was made through a recording mechanism commonly referred to as the 'Delivery Order'. This process required the preparation of a written order to be signed by the purchaser and delivered to the warehouse to notify the transfer of ownership. It is worth noting that this prescriptive legal requirement to raise a 'Delivery Order' was repealed under the Finance Act 2006. HMRC moved to a registration-based tracking system whereby cask owners and purchasers are required to notify HMRC on the transfer of ownership. In accordance with HMRC's Excite Notice 197, prior to any cask sale, a cask owner should: (i) contact HMRC’s excise liaison office and ask for confirmation of the purchaser’s registration; and (ii) inform the warehousekeeper that the goods are to be sold and provide details of the purchaser’s registration. And vice versa, prior to making any cask purchase, the purchaser (or his/ her appointed representative) should: (i) contact HMRC and ask for confirmation of the seller’s registration; and (ii) inform the warehousekeeper of the purchase and give details of the purchaser's registration to the warehousekeeper.

As such, formal notification requirements still apply to cask purchase sales. In our experience, the use of the term 'Delivery Order' is still widely used within the industry to describe the HMRC notification obligations that cask owners must discharge.

Complying with these notification requirements establishes a clear audit trail of cask ownership (and transfer of ownership). In addition, it is always prudent for a purchaser to enter into a formal contract of sale with the selling entity, which will govern the legal rights governing that sale. In particular, the selling entity would be expected to warrant in that sale agreement that they hold legal title to the cask and therefore have the capacity to transfer title to a purchaser.

Finally, it is important to note that warehousekeepers continue to hold record retention obligations for revenue control purposes. Specifically, they must retain records of casks owned by third parties in their warehouses, including up to date records of the name and address of cask owners that hold goods in their warehouses as well as retaining updated records on change of ownership.

The role of the intermediary

Facilitating the introduction of buyer clients to premium casks requires an intricate knowledge of the whisky sector. A respected intermediary will hold strong relationships with brand owners acquired through years of working in the sector and developing relationships with those distilleries. The strength of that relationship means that intermediaries are ideally placed to either: (i) purchase casks directly from a brand owner and subsequently sell those casks to a buyer client (but fundamentally retain the ability to transfer legal title to the buyer client); or (ii) introduce buyer clients to a distillery that wishes to sell a specific cask. This business model is built on trust and close working relationships. However, the growth of the whisky market and specifically, the trade in whisky casks has led to a significant rise in the number of businesses operating within the sector.

A major concern that has materialised in recent years has been the rise of intermediaries promising services to customers that cannot be delivered. For example, if an intermediary purchases a cask on behalf of a buyer client but legal title is held elsewhere, then the buyer client is not protected and they could be making a significant investment in an asset to which they do not hold title. This scenario underlines the fundamental importance of selecting intermediaries with a trusted and well-established market reputation.

Cask sales and consumer protection

Any business involved in the sale of whisky casks should be able to satisfy the following three core obligations:

• Cask identification and evidence of cask quality

Each cask should be capable of being identified by reference to a unique cask number linked to the distillery. A buyer should have the opportunity to visually inspect the cask, firstly to ensure that it exists but also to visually inspect the cask quality and storage conditions.

• Post sales service

It is common practice for a distillery/ warehouse to offer buyers the ability to visit the cask from time to time. A buyer should be comfortable in knowing where the cask will be stored and crucially if the cask will ever be moved to a new facility.

• Initial costs vs future (exit) costs)

The purchase price of the cask is only the initial outlay and additional storage costs may apply. For example, ongoing storage costs may become payable after a fixed period. If a buyer wishes to bottle their cask, excise duty will be triggered when the bottles are dispatched to the owner and bottling charges will also apply. A purchaser should also be clear on any restrictions to third-party bottling or retained rights exercisable by the brand owner i.e. restrictions on referencing the distillery of origin on the bottled liquid. Businesses must ensure that consumers are given clear and transparent information on these costs and the process that may trigger those costs. Indeed, the lack of transparency on terms and conditions was one of the issues identified by the ASA in two recent rulings leading to the ASA upholding a complaint of misleading advertising practices. For further discussion of those rulings, see our earlier blog post.

Brodies has extensive expertise advising on advertising compliance and issues relating to the purchase of Scotch whisky casks. If you are looking to acquire a cask and would like to discuss how we can assist, or any of the issues covered in this blog, please get in touch.