In February 2023, French inflation was rocketing and reached a terrifying 6.3% (low compared to 9.6% in the UK).
It finished 2024 at a much more acceptable 1.3%.
So, it all appears to be under control, looking like good news for French residents. Less inflation means lower price increases, right?
For many living in France, however, including those from the UK, the shift has brought an unwelcome surprise: increasing local taxes.
This curious contradiction between falling inflation and rising taxation has left many worried about how to best protect their purchasing power or, as the French say, their pouvoir d’achat, a topic that has been very popular in the French news for the past few years.
The solution is thoughtful financial planning, investing intelligently, and working to minimise tax liabilities.
Falling inflation and rising taxation
Understanding how local taxes in France are calculated helps to explain this peculiar dynamic.
Taxes such as taxe foncière (property tax) are based on cadastral rental values (valeurs locatives cadastrales), which are updated annually to reflect various economic factors.
While this may include inflation, there are other pressures that have proved to be considerably more significant.
Read more: Consider the tax implications of making a gift in France
Local councils control their own local taxes and have been under significant pressure to raise tax rates to cover budgetary shortfalls. Rising energy costs, infrastructure maintenance and public services have all stretched communal budgets thin.
The result is that many homeowners and property investors have been hit with eye-watering tax hikes, even as inflation slows. For second home owners, local councils may now apply a surtax.
Impact on foreign residents
Naturally, for those who receive their income in a currency other than the euro, there is an added risk of currency fluctuations.
I am sure many UK readers still reminisce about the days when £1 was valued at €1.50! Of course, you may also recall the pound hitting parity, and we are a far cry from that, having had relative stability for the past five years.
UK nationals living in France are uniquely vulnerable to these financial shifts. Many rely on fixed incomes, such as pensions, that do not always rise in line with inflation.
When local taxes increase, it directly hits their budgets, leaving less for day-to-day expenses and long-term savings.
In addition, those holding significant cash reserves, regardless of which currency, are seeing the real value of their savings erode over time.
Even with lower inflation, money sitting idle in a bank account fails to keep up with rising costs or tax bills.
However, with the pound holding steady at five-year highs, now is an excellent time to consider converting more significant sums to euros to benefit from the favourable exchange rate.
Tools such as forward contracts can also help lock in these rates for future transfers, reducing the risk of losing out if the exchange rate drops. For those unsure of when to act, spreading transfers over time can help mitigate risks while taking advantage of current highs.
Read more: French bank accounts: what foreigners need to know
Intelligent investing
One of the most effective ways to protect your wealth is through intelligent investing. This involves building globally diversified portfolios that are designed to outpace inflation over the long term.
Key points to consider
Diversification: A well-diversified portfolio spreads risk across different asset classes and markets, reducing the impact of volatility. By investing in a broad range of equities, bonds, and other assets, you can achieve steady growth that keeps pace with, ideally exceeding, inflation.
Currency hedging: Exchange rate fluctuations can be just as damaging as inflation for expats. If your income or investments are tied to the pound, sharp swings in GBP/EUR rates can significantly impact your purchasing power. By using currency-hedged investment strategies, you can protect your wealth from these fluctuations.
Low-cost, evidence-based portfolios: Investing does not have to be expensive or complicated. Low-cost, evidence-based portfolios focus on delivering consistent returns without unnecessary fees.
By putting your money to work, you can stay ahead of inflation.
Read more: Five musts when you fill out your French tax return
Direct action on local taxes
Review your cadastral value: The cadastral value of your property determines your taxe foncière. Errors in this valuation are not uncommon, so correcting them could significantly reduce your tax bill.
Explore exemptions: Certain groups, such as retirees and those with disabilities, may qualify for partial or complete exemptions from taxe foncière. It is worth checking whether you meet the criteria.
Compare communes: If you are planning to buy property, research the tax rates of different communes. Some areas have significantly lower rates than others, which could save you thousands over time.
The bigger picture
While rising taxes and falling inflation may feel like opposing forces, they both highlight the importance of proactive financial planning. Whether investing your savings, managing your tax liabilities, or staying informed, taking control of your finances is the best way to protect your purchasing power and grow your wealth for the future.
