Mansion tax fears trigger sharp fall in London’s prime property prices

London’s Grade A property market has suffered its biggest decline in more than four years amid growing fears that Chancellor Rachel Reeves will unveil a mansion tax in her first Budget.

New figures from Knight Frank show that the average price of “prime” homes in London fell by 4% in the year to October, the biggest fall since February 2021. Analysts say the decline was caused by long-standing uncertainty over potential new taxes on luxury properties.

Tom Bell, head of UK housing research at Knight Frank, said speculation surrounding the policy had already cooled demand at the top end of the market.

“It’s a reminder that property taxes often come with unintended consequences,” he said. “If you tax so-called palaces, you will end up with fewer of them.”

It is understood that Reeves is considering introducing a 1% annual tax on the portion of a property’s value above £2m, which would mean a £3m home would face an annual tax bill of around £10,000.

According to Knight Frank, more than 150,000 properties across England and Wales could be affected if the measure is implemented.

Another option said to be under review is to double the top two council tax bands, which would also target owners of higher value homes.

The Chancellor’s plans – expected to be confirmed in the November Budget – have prompted many would-be buyers to pause or abandon purchases, leading to falling prices and a sharp rise in demand for luxury rentals.

Knight Frank’s analysis shows that mansion prices in prime central London have fallen by 8% since 2012, the year the Liberal Democrats first proposed a tax on homes worth more than £2m.

This discussion, although the tax was never implemented, prompted former Conservative Chancellor George Osborne to increase stamp duty on high-value homes in 2014 – a move that further dampened demand at the top of the market.

Bell warned that the latest speculation risked “repeating history”, adding that the impacts could extend far beyond London’s richest postcodes.

“The continued decline in prices next year depends on whether the government chooses to repeat history or learn from it,” he said.

The uncertainty has also led to a shift towards the luxury rental market, with demand for luxury rentals rising 10% in recent months as affluent households prioritize flexibility over budgeting.

Average rents in prime central London rose 1.9% year-on-year to October – the biggest increase since August 2024 – while rents in prime outer London areas rose 2%, Knight Frank said.

David Mumby, head of prime central London lettings at the agency, noted: “For tenants, the bleaker they feel things are, the more they prioritize liquidity and cash in the bank. This supports strong demand in the rental market.”

While the Treasury has yet to comment on the proposals, economists warn that further uncertainty could deepen the slowdown in high-value property transactions – and extend to associated industries such as construction, design and legal services.

Until the Chancellor provides clarity on her property tax plans, analysts expect buyers to remain cautious, sellers to lower their expectations and the prime London market to remain under pressure.

They say the next Budget will determine whether this is a temporary correction or the beginning of a longer-term shift in Britain’s luxury property landscape.