If you are considering switching from a continuous (*voortdurende erfpacht*) to a perpetual leasehold (*eeuwigdurende erfpacht*), you need to decide how you are going to pay for the privilege of being a leaseholder in perpetuity. The Gemeente will make you an offer (sadly not one that you simply cannot refuse), and you will need to choose a payment option: an annual payment or a lump sum.
This is a tough decision, because you don't own a crystal ball. How bad will inflation be in the future? How will your investments perform? How drastically will tax laws change? This calculator provides a framework to make a decision - you make your best guesses about the future, and based on those guesses the calculator tells you which option is mathematically superior.
How does this calculator work?
The calculator is based on the principle of a safe withdrawal rate (SWR). The concept of a safe withdrawal rate is normally used for retirement planning - how large a nest egg do you need to accumulate so that you can live off it in retirement. Here we use the concept of a SWR to determine the following:
What if instead of paying the Gemeente the lump sum, you were to invest it instead? Would the nest egg thus created support a withdrawal of the annual canon in perpetuity?
For a duration of 100 years the calculator:
1. Assumes the lump sum grows by the return rate you enter.
2. Assumes that you pay box 3 taxes on the lump sum.
3. Assumes the annual canon increases by the inflation rate you enter.
4. If it is past the year you entered to switch to the perpetual canon, the annual canon is deducted from the lump sum.
If after a 100 years the lump sum is not depleted and the withdrawal rate is safe, the calculator will advise you not to pay the lump sum to the Gemeente.
If after a 100 years the lump sum did not run out, but the withdrawal rate is no longer safe, the calculator will say that you should maybe consider paying the lump sum to the Gemeente.
If within the 100 year period the lump sum runs out the calculator will advise you to choose the lump sum option and pay off the Gemeente now.
Assumptions
1. We assume a safe withdrawal rate of 3.5%. The original SWR study recommended 4% but there has been subequent analysis (for example, see the ERN SWR series) that shows that 3.5% holds up better for longer durations.
2. Under current law an annual payment is tax deductible, but a lump sum payment is not. So, when we are determining the future inflation-adjusted annual canon, we assume that 37% of the annual canon would be tax deductible at a marginal rate of 49%.
3. We assume that box 3 taxation eats away at the capital. The new box 3 scheme based on real returns is still only a proposal, so this calculator simply assumes that 31% (the current box 3 tax rate) of the returns every year are taxed.
Disclaimers
This is a simplistic model. While your investments may return of average of say 7% over a period of 100 years, the stock market does not return a predictable 7% every year. So in real life your invested lump sum will suffer from sequence of returns risk - a few initial bad years of returns may make your annual withdrawals non-sustainable, even if the average returns over a 100 years end up being 7%. This calculator obviously cannot guarantee that real life will mimic the 100-ish lines of code that produce the outcome of the calculator. The goal is to give you a framework within which you can evaluate your payment options and make an informed decision.
Enter the lump sum cost of buying out the canon in perpetuity
In the offer letter from the Gemeente this will be called something like *Afkoopsom eeuwigdurende erfpacht* in Dutch. Note that a lump sum payment to the Gemeente is not tax-deductible.
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Enter the annual canon value that you can lock in now
In the offer letter from the Gemeente this will be called the *jaarlijkse canon* in Dutch. If you choose not to make a lump sum payment, this is the annual amount that you will need to pay the city in perpetuity. The canon is based on the land value. You are locking in a value for perpetuity based on the value of land today. So no matter what happens to the value of the land in the future, your payment is unaffected. it is worth noting that while the annual canon is fixed with respect to the value of land, it can still increase based on inflation.
If your current continous leasehold is bought out until some year in the future, this annual canon payment starts after the current period expires.
The annual canon payment is tax deductible.
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Enter the calendar year in which you will switch to a perpetual leasehold
If your continuous leashold has already been bought out (typically for a period of 50 years), then your first annual payment under the perpetual leasehold will be due once your continuous leasehold expires.
Assumed rate of inflation
Inflation - the big unknown! The annual payment that you lock in now will be inflation adjusted to the year in which your payment is due. Enter the rate of inflation that you would like the calculator to assume.
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Assumed nominal rate of return on investments
Enter the nominal rate of returns that you would like the calculator to assume. For reference, the average annualized return for the S&P 500 from 1957 to 2021 was 10.67%.
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