This liquid investment gets better with age ...

DRINKERS who enjoy being warmed by a wee dram of whisky on a cold winter’s night might be tempted to invest in this liquid gold. But although it can provide great returns there are potential pitfalls.

The value of rare whisky has soared in recent years – with the most sought-after bottles rising in price by more than 400 per cent over the past decade.

But over the past 12 months the Rare Whisky Icon 100 Index – which measures a hundred of the most collectable bottles – has seen its value tumble by 10 per cent.

Part of the reason for this is a 25 per cent tariff slapped on single malt Scotch imported into the US from October last year. The tax was introduced as a retaliation against the European Union for subsidising aircraft maker Airbus.

And investors must exercise caution for other reasons. More than a third of ‘vintage’ Scotch whiskies tested at the Scottish Universities Environmental Research Centre in East Kilbride a couple of years ago were discovered to be fake – with incorrect ages and unexpected blends. And because whisky is traded in an unregulated market, those who are cheated cannot seek redress from the Financial Services Compensation Scheme.

Investment quality whisky is always single malt and should not be confused with cheaper, blended whiskies. Blends account for more than 90 per cent of all whisky consumed, and are a mix of spirits from different distilleries.

Investment quality whisky usually costs at least £150 for a 700millilitre bottle and comes from a distinguished distillery where it has been aged at least 20 years.

Graeme Maxwell, whisky auctioneer at McTear’s Auctioneers, says: ‘There are a growing number of people dealing in whisky – many because they have heard of the great returns that can be made.

‘ But just like any market, you must take expert advice and only use a reputable dealer.’

The most sought-after whiskies are those from Scottish distilleries – Scotch whisky – that have been aged in the barrel for more than two decades.

Any spirit must be kept in a barrel for at least three years before it can officially be called whisky and is usually stored for a minimum of ten years before bottling.

Maxwell points out that the name of the distillery is one of the most important factors for potential investors.

Among the most highly regarded distilleries are Macallan, Ardbeg, Balvenie, Bruichladdich, Bowmore, Dalmore, Glendronach, Highland Park, Glenfiddich, Springbank, Dalmore and Talisker.

Spirits from historic distilleries that have closed down are also always in great demand – because as the years go by there is a diminishing supply of their whisky available. Such former distilleries include Brora, Dallas Dhu, Glen Flagler, Rosebank and Port Ellen.

You should also look out for limited editions. Fifteen months ago, the world record for a bottle of whisky was broken at auction house Bonhams when a 60-year-old bottle of Macallan ‘Adami’ 1926 sold for £849,000. The whisky was one of only a dozen limited edition bottles produced with a label illustrated by artist Valerio Adami – so not just fine whisky but a rare work of art.

Buying from an auctioneer is the most popular way to get investment quality whisky. More than 100,000 bottles a year are auctioned, to the value of £40 million. Yet auctioneers levy hefty charges. McTear’s typically demands a 24 per cent buyer’s premium on top of the hammer price. When selling, McTear’s usually charges 15 per cent of the sale price.

Although fees are high, you are guaranteed the real thing. If there are provenance problems later on the auctioneer will give a refund.

Once whisky has been bottled it should remain unchanged and taste pretty much the same as long as it is stored out of direct sunlight.

Even if kept aside for a hundred years, the flavour remains. The age on the side of the bottle reflects how long it has been stored in a casket and it is this time that gives the whisky its colour and flavour.

Most investors buy their whisky bottled, but it can also be bought in the barrel in a bonded warehouse. This enables investors to avoid paying duty or VAT if it is later sold back to the producer.

Prices typically start from £1,000. You can buy 240 litres of pure alcohol (LPA) – the measure used for casket whisky – of malt for about £750. But there are also storage and insurance costs that can add a further £50 a year to the final price. About 2 per cent of the contents evaporate every year when the whisky is in the casket – charmingly known as ‘the angels’ share’.

After about eight years you might have enough for more than 200 bottles of whisky – which is used for blending with others.

There are also trading fees to consider. Dealer WhiskyInvestDirect charges a commission of 1.75 per cent of the value – for both buying and selling.

Adrian Ash, of WhiskyInvestDirect, says: ‘Holding a mix of maturing Scotch whiskies from different distilleries has shown an average annual investment return of 8 per cent since 2015.

‘Good Scotch gets better with age. The longer it stays in the barrel – maturing and gaining depth and flavour – the more whisky fans pay to enjoy it. So getting involved in buying whisky when still barrelled can be an exciting alternative investment.’

Ash suggests t hat i nvestors should be willing to tie up their money for at least three years – ideally ten – if they want to enjoy a healthy l ong- t erm i nvestment return.