London’s top property market has suffered its biggest fall in more than four years as fears grow that Chancellor Rachel Reeves will unveil a property tax in her first budget.
New figures from Knight Frank show the average price of “prime” homes in London fell 4% in the year to October, the biggest fall since February 2021. Analysts say the fall was fueled by ongoing uncertainty over potential new taxes on luxury properties.
Tom Bill, head of UK residential property research at Knight Frank, said speculation about policy had already dampened demand at the top end of the market.
“It’s a reminder that property taxes often have unintended consequences,” he said. “If you tax so-called villas, you will end up with less of them.”
Reeves is apparently considering a 1% annual levy on the portion of the property’s value over £2 million, which would mean a house worth £3 million would face an annual tax bill of around £10,000.
Knight Frank said the introduction of the measure could affect more than 150,000 properties across England and Wales.
Another option said to be under consideration is doubling the two highest council tax rates, which would also target owners of high-value homes.
The Chancellor’s plans – which are expected to be confirmed in the November Budget – have already caused many potential buyers to pause or cancel purchases, causing prices to fall and a sharp rise in demand for luxury rental properties.
Knight Frank analysis shows that prices for mansions in prime central London have fallen by 8% since 2012, the year the Liberal Democrats first proposed a tax on homes worth more than £2 million.
That debate, although the tax was never introduced, led former Conservative chancellor George Osborne to increase stamp duty on high-value properties in 2014 – a move that further dampened demand at the top of the market.
Bill warned that recent speculation could “repeat history”, adding that the impact could extend beyond London’s wealthiest postcodes.
“Whether the price decline continues next year depends on whether the government decides to repeat history or learn from it,” he said.
The uncertainty has also led to a shift towards the high-end rental market, with demand for luxury rentals rising 10% in recent months as wealthy households prioritize flexibility over budget.
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 rose 2%, Knight Frank said.
David Mumby, head of prime rentals in central London at the agency, noted: “The direr the situation becomes for tenants, the more they value liquidity and cash in the bank. This supports strong demand in the rental market.”
While the Treasury has not yet commented on the proposals, economists warn that further uncertainty could deepen the slowdown in high-value property transactions – and impact related 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 London’s prime market to remain under pressure.
They say the coming Budget will determine whether this is a temporary correction – or the start of a longer-term change in the UK’s luxury property landscape.
