Avoiding Wine Investment Scams

The best piece of advice anyone can give on how to avoid an investment scam is never to accept a cold call and never deal with a company that cold calls. Deceptively simple but almost all of the many victims of wine investment and other alternative investment scams that I have come across have been initially suckered by a hard selling cold call.

Investments that are regulated in the UK by the Financial Conduct Authority (FCA) are forbidden to cold call and only make calls under certain conditions. Unfortunately few alternative investments, unless they are judged to be collective investments, come under the remit of the FCA. Companies selling cases of wine are not regulated, whereas wine funds, which operate like a unit trust, are subject to the control and rules of the FCA as they are collective investments.

Not surprisingly the vast majority of wine investment frauds involve companies, who sell cases of wine, so they are not regulated.

Successful fraudsters have no conscience. Elderly and vulnerable people are seen as legitimate targets and scammers have no qualms in defrauding them of their life savings. I have been contacted all too often by sons and daughters of elderly parents, who discover that they have lost life savings to an investment scam.  It is well worth warning them of the dangers of accepting cold calls and keeping a discreet eye on them – not always easy!

Once you have been scammed you are very likely to be on a suckers’ list and will be contacted by other companies, often known as white knights, offering help. Of course assistance is the last thing they will provide as they are seeking to further thin your wallet.

Recently there have been many examples of companies offering to sell wine for investors at well above the market price. Often the pitch includes an impatient Chinese client who urgently requires the wines you hold. Unfortunately this is complete fiction and once an incautious investor has transferred their wine to the new company’s account, the Chinese client disappears along with the wine and the white knight company.

There are now an increasing range of phones that are designed to block out nuisance calls. You can also put your number on a no nuisance call list. In the UK there is the Telephone Preference Service (http://www.tpsonline.org.uk/). However, I find this doesn’t work well. The good news is that it is now much easier for companies making nuisance cold calls to be fined.

Always check out companies, directors and wine prices. Fortunately one of the great advantages of the net is that due diligence is much easier to do. Scam company websites rarely have specific details – names of directors etc, and details of their experience. Instead there is generalized, meaningless flowery guff. Graphs of wine prices showing stratospheric rises are rarely up to date. Fine wine prices have fallen over the last three years. Furthermore sites like wine-searcher, Liv-ex and Wine Owners, have brought price transparency to the fine wine market.

Previously there was a charge for downloading all but the most basic information on a company. Now under a new UK Government directive information is free. This means that a host of company documents can be downloaded quickly for no charge and is an invaluable resource. (https://beta.companieshouse.gov.uk/)

It can be but you have to buy the right wine at the right time, at the right price and from a trustworthy source. In principle wine should be seen as a medium to long-term investment and should only make up a small proportion of your investment portfolio.

Although wine investment companies love to claim that over the last 30/50 years that wine, without specifying which ones, have increased in value by over 10% (check figure) per annum prices of fine wine do not increase in a regular manner. Nor do they always increase – indeed some times they can decrease sharply. Prices often hit a plateau with little change over a number of years followed by a sharp increase.

For instance prices fell in 1997 and remained pretty static until late 2005/early 2006, when the quality of the 2005 Bordeaux vintage started to inflate the market and as this happened previous vintages started to look cheap, so they rose as well. This combined with the banking crisis of 2008 and growing demand from China pushed wine prices up dramatically. Indeed investors, who had over-paid for their wine at the beginning of the 21st Century started to move into profit. Of course, had they not been overcharged in the first place their profit would have been that much healthier.

This is a frequent made claim that asserts that wine will always keep its value not matter what happens to the economy. Although wine does not have the volatility of shares, it is nonsense to claim that wine prices do not reflect movements in the wider economy.

Fine wine is a luxury – clearly the essence of its attraction as an investment. In times of economic crisis or hardship people cut back on non-essential goods. If you have suddenly lost huge sums on the stock market or been made redundant from your very well remunerated job, buying cases of Château Pétrus or the like will certainly not be a priority. You only have to remember the parlous state of Bordeaux during the 1930s to know that fine wine is certainly not ring fenced against economic changes.

Yes it is liquid but is it a liquid asset? A frequent claim is that wine is not affected by economic crises. A little thought will show that this is nonsense. Wonderful though it can be fine wine is by no means an essential item. If economic disaster has struck – a stock market crash or banking crisis wiping out jobs and fortunes – victims will be looking for the basics to sustaining living not buying luxury items such as fine wine.

It can take time to sell fine wine, especially in a crisis.

The answer is often not simple as a look at the UK, US and Hong Kong shows:

In the UK the position on capital gains tax is quite complex. Many wine companies like to claim that profits made on selling wine are free of capital gains tax because it is classed as a wasting asset by HMRC because it had a life of less than 50 years. However, many wines that are suitable for investment are likely to have a life of more than 50 years. If, for instance, top Bordeaux did not have the capacity to age the famous 1961s would by now be undrinkable. Clearly this is not the case.

Buying top Bordeaux, easily the favourite investment vehicle, en primeur or just after it has been bottled, makes it very likely that it will not be a ‘wasting asset’. If, however, you are able to buy today a genuine 1945 Mouton-Rothschild, it is likely to be considered a ‘wasting asset’ as it may well not be drinkable in a further 50 years.

There is also the important question whether bottles are treated as individual items or part of a set. A case of 2005 La Tache, for example, in its original wooden case would surely be a set. Whereas a case comprising six bottles of La Tache all from different vintages are likely to be treated as individual items. This distinction is crucial as you pay capital gains tax on a possession that costs £6000 or more. There is an annual overall tax-free allowance of £11,100 (tax year 2015-16).

Inheritance tax is more straightforward. Wine forms part of someone’s estate, so can be liable to inheritance tax. The notion of ‘wasting’ asset does not apply for this tax, which is calculated on the current price not on the price at which it was bought.

Hong Kong
It all depends upon whether the tax authorities consider you are trading as selling capital assets are not liable to tax. A number of factors could persuade the authorities that an individual is trading: the reason the wine was bought, holding the wine for a short time, repeated selling and the intention of making a profit by reselling. However, all of these criteria would have to be fulfilled. Tax is levied at 15%. There is no inheritance tax.

USA

In the United States the position is complicated due to having both federal and state taxes, which vary from state to state. The level of tax payable will depend upon whether the tax authorities deem that the level of transactions is sufficiently high to indicate that this is a business rather than just an occasional sale that would so qualifying as a capital gain. Income tax rates are considerably higher than those levied on a capital gain.

Inheritance tax is payable on wine left as part of a person’s estate. There may often be a dispute between the individual and the tax authorities over the wines’ value. Also, as auction houses are not required to divulge details of sales – whether in an auction or a private sale, there is no official ‘money trail’, so it is possible to claim that the wine was drunk rather than sold.

There are the costs of keeping wine stored in bond – this avoids paying excise duty and vat (sales tax) all the time the wine remains in a bonded warehouse, so if wine is bought for investment it needs to remain in bond.

It is best to have your own account to give complete control over your wine. If it is stored in a client account under a wine company’s umbrella account you are then dependent on the wine company carrying out your instructions.

I have lost count of the number of articles on UK wine investment that have concluded with this trite journalistic conceit: ’if it all goes wrong you can always drink it’. True enough but this ignores that the investment wine is almost certainly in bond, so excise duty and sales tax will have to be paid to get the wine out of bond. Furthermore if we’re conned into paying too much for your wine the sales tax will be charged at the price you paid.

If you do decide to go ahead with wine investment make sure you get expert advice, unless you are very knowledgeable, do your own due diligence and, most importantly, put the phone down on cold callers.

Acknowledgements:

My thanks to Eliza Chow, Aoba Business Consulting Limited, for details on Hong Kong taxes and to Stephen M. Moskowitz, senior partner of Moskowitz LLP in San Francisco. For details of taxes in the USA.