Wine investment code (WIC): a code of practice

The code: amended draft: 27th April 2011

(comments welcomed)

Background

People have long used wine as an investment. In the past it tended to be confined to a small number of enthusiasts, who often used the profit from selling some of their wine to finance further buying for their drinking pleasure. 

Buying wine as a pure investment, however, is a more recent development. Many, who invest in wine now, do not intend to drink any of the wine they buy and treat it as a financial implement – an alternative investment.

Investors have two options: to buy individual cases of wine or to pay into a wine investment fund. Wine investment funds are defined as ‘collective’ investments and therefore their management is usually subject to regulation by financial authorities. 

Over the last 10-15 years wine investment has become an increasingly hot topic and has inevitably attracted a large number of dubious operators. Wine investment is now newsworthy because of the rising prices of top wines fuelled by demand in China and elsewhere in Asia-Pacific, and also by the quest for an alternative investment, which might outperform stockmarkets.

With the recent sharp rise in the value of certain wines, in particular top Bordeaux and Burgundy, there is an increasing need and obligation for the fine wine trade to operate ethically and professionally and be seen to do so.

Although there is an element of financial regulation for the management of wine investment funds, especially regarding how the funds can be marketed, there is no regulation of companies that sell (or in some cases purport to sell) cases of wine as an investment. The public are offered no protection – anyone can set up a wine investment business and claim expertise.

How will the code work?

The code provides potential investors guidance on how a company offering wine investments should operate. It has been drawn up in association with many of the leading UK wine merchants and fine wine brokers.

Because of the difficulty of vetting and policing companies there will be no formal association or signing up by companies to the code. Companies will be free to adopt the code if they wish. Although this is not ideal, the fine wine trade may decide to opt for a more formal arrangement – an association perhaps. This might be done, for instance, through the WSTA (Wine & Spirit Trade Association) or BSI (http://www.bsigroup.com/)

Role and list of supporters – wine writers and communicators

The purpose and role of the supporters is to demonstrate the extent of the concern over dubious wine investment companies as well as give the code additional exposure and credibility. Supporters are not be limited to those who write about fine wine only as many people who buy unsuitable wine investments know little or nothing about the wine they are buying. We need to reach beyond knowledgeable amateurs.

Supporters undertake to promote the wine investment code. 

The wine investment code:

The top four code items:   

1)    No cold calls

2)    No claims of guaranteed returns

3)    No claims that wine investment is invariably tax free

4)    Actual trading address to be used on website and company stationery rather than a serviced office/accommodation address/virtual office

The wine investment code in full:

Companies should:

1. Not use cold calls. Companies should not canvas customers with whom they have no previous commercial relationship or where no call has been requested. (see note)
2. Not send junk email offering wine investment opportunities unless this material has been requested or there is a previous commercial relationship. 
3. State and explain all commissions charged to the client, including any portfolio management fees. Clients should be aware that should the company they bought from cease trading then it is highly probable that they will have to pay a commission on selling their wine, irrespective of any assurances of commission-free sales made at the time of purchase.
4. Advise customers on any commissions levied when they come to sell their wines and that these may change over time. 
5. Not to make claims of guaranteed returns.
6. Advise customers that the price of wine may go down as well as up and that future trends may not mirror past ones.
7. Make no claims that profits on wine investment are invariably free of either capital gains tax or inheritance tax. To advise customers that these taxes may apply on any profit made and that they should seek expert tax advice. (Note: see Inland Revenue Tax Bulletin Issue 42 Wines & spirits: the capital gains tax treatment. Also HMRC August 2010 newsletter wine valuation.) (Also see note on tax.)
8. Not sell en primeurs (includes en primeur vouchers) in advance of the price being released. This does not preclude wish lists or giving an indication of estimated prices.
9. Make clear to the customer the provenance and the condition of wines offered for sale. This should include any factors that might reduce the price on resale or make it difficult to sell. In particular to ensure that original wooden case (OWC) means exactly that and not a case of odd bottles, possibly of varying provenance, put together and re-packed in a spare empty case of the same wine. To declare any US stock.  
10. Should inform clients whether the stock is ‘duty paid’ or ‘in bond’. Wine used for investment is normally stored ‘in bond’.
11. Inform customers, at the time of purchase, whether they have the wine in stock or whether they will have to source it. If the wine is not in stock, clients should be told how long they can expect to wait before they receive their wine.
12. Tell clients when their wine purchase will be transferred into their account or into the company’s customer reserves.
13. Explain the variety of storage options – customer reserves, own account etc. –  to new customers considering wine investment. (See note)
14. Make available valuation of portfolios. These valuations should be based upon the asset’s actual realisable price. (See note)
15. Should advise clients, should the need arise, where they can get an independent valuation. (See note)
16. Not to ‘borrow temporarily’ any wines from Customers’ Reserves without the customer’s knowledge and consent nor to later replace them with other stock without the customer’s knowledge and consent.
17. To comply with the current version of the Distance-Selling-Regulations . (See note on en primeur sales.)

Websites

The following details should be on websites:

1. Company name and company number.
2. VAT number
3. Name of managing director
4. Address of registered office and trading address – not a virtual or serviced office address.
5. Qualifications and experience in offering advice on wine investment.
6. Any further information required by law.

Notes

Cold calls

Although a few companies, amongst those canvassed when putting this code together, have argued that cold calls should be allowed under certain conditions, the great majority of companies are against the use of cold calls on the grounds that their use damages the reputation of their company and are ineffective.

The FSA bans their use of cold calls in the marketing of wine funds and also for the sale of mortgages.

Almost all the examples of ill-advised wine investments that have come to my attention, since setting up investdrinks.org in 2000, have been as a result of cold calls.   

 

Tax-free?

Claims that wine investment is invariably tax-free are incorrect – both for capital gains tax and inheritance tax. It would seem likely that the HMRC’s tax take is greater from inheritance tax than it is from capital gains.

Capital gains

The current HMRC position is set out in ‘Inland Revenue Tax Bulletin Issue 42:  Wines & spirits: the capital gains tax treatment’ (http://www.hmrc.gov.uk/bulletins/tb42.htm)

Most wine is treated as a wasting asset as it has a life of less than 50 years. However, wines that can be expected (backed up by the experience of the longevity of previous vintages) to live more than 50 years from the time of purchase would be subject to capital gains if the gains exceed the limits current at the time. The 50 years is counted from the time of purchase not from the time that it was made.
 
Inheritance tax

HMRC will levy inheritance tax on wine, which for the purposes of inheritance tax the authorities do not treat as a wasting asset. Tax due will be calculated on current value and not purchase value.  See page 5 of HMRC’s August 2010 newsletter (http://www.hmrc.gov.uk/cto/newsletter-aug10.pdf).

Wine writer Anthony Rose has a useful article on tax and wine here: http://www.anthonyrosewine.com/journal/2010/11/taxing-issue-caveat-wine-investor

En primeur
This is the practice of selling wine while it is still in barrel. Buying en primeur means that you pay for your wine up to two years before it is bottled and shipped. The risks are obvious: if you buy from a company that goes bust or one that just disappears, having pocketed your money and failed to place any orders. In the wrong hands en primeur can be a gold plated vehicle for fraud.   

The inherent risks in buying en primeur can be greatly reduced if you buy from an established company with a track record of successfully delivering wines ordered en primeur. Do not buy en primeur from a company you know nothing about. 

Bordeaux is the region where en primeur is most used. In late March/early April the world’s fine wine merchants and press descend on Bordeaux to taste the young wines from the top properties. In 2011 they tasted the 2010s.  Following these tastings the châteaux gradually release their prices over next couple of months or so. This slow process can take up to almost the end of June. The Bordeaux châteaux do not sell direct. Instead they sell to the Bordeaux merchants (négociants in French), who then sell the wines on to merchants around the world.

See also WSTA guidance on en primeur here – http://www.wsta.co.uk/Guide-to-the-en-primeur-wine-market.html 

En primeur and distance selling regulations

The distance selling regulations (EU wide legislation) allows a client who has bought a product over the phone, internet etc. to have the right to cancel the purchase up to seven business from the day after the item has been delivered.

Technically this might allow someone to order wine en primeur and then two years later decide to cancel. The wine trade has long been seeking a derogation for en primeur and while the EU may have agreed to this in principle it has yet to be incorporated into any legislation. Thus the legal position remains unclear – it has not been tested in the UK courts. 

Storage

The importance of storage is often forgotten. Any investment wines should be stored in bond – free of excise and sales tax while it remains in bond. It is best to store wine in your own account. This allows you to have full control over your wine. If it is stored under customer reserves then you will need the agreement of the company, who holds the reserves, to move your wine. The company can also move your wine without your permission and should they go bust or disappear you may well have problems securing your valuable wines. 

You can set up accounts directly through a bonded warehouse. Alternatively wine companies can make the arrangements with the bonded warehouse.

Pricing and valuations 
The internet has now made wine pricing far more transparent. It is now possible to check the price of wine around the world. I find wine-searcher (www.wine-searcher.com) invaluable and suggest that the professional version is well worth the small annual fee charged.  

Independent valuations can also be obtained from a number of sources: some examples are by using Liv-ex, CellarTracker, Langton’s (http://www.langtons.com.au/service/Selling.aspx). Wine-searcher will also provide a valuation of your portfolio for a fee (http://www.wine-searcher.com/valuation.lml). Albany Portfolio Management provides a price checker based on wine-searcher but gives an average price.

You will need to check whether any valuation is the likely realisable price or what it would cost you to buy the wine.

Distance Selling Code

The Wine & Spirit Association has a code for distance selling. It can be downloaded here: www.wsta.co.uk/Distance-selling.html

This code includes advice on buying en primeur and on tax that may be due on wine investments.

Disclaimer:

Please note that this code is for guidance on wine investment with the aim of reflecting best business practice by UK wine merchants. There is no acceptance for liability any inaccuracies or omissions therein or for any typing errors. Anyone considering wine investment is urged to research the subject carefully and to do their due diligence on companies from whom they are considering buying wine.    

© Jim Budd 2011

The Wine Investment Code is free to use but may not be amended or changed without permission.