London’s top-tier property market has suffered its steepest fall 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” London homes fell 4% in the year to October, the sharpest decline since February 2021. Analysts say the drop has been fuelled by prolonged uncertainty over potential new taxes on luxury properties.
Tom Bill, head of UK residential research at Knight Frank, said speculation surrounding the policy was already cooling demand at the upper end of the market.
“It’s a reminder of how property taxes often come with unintended consequences,” he said. “If you tax so-called mansions, you will end up with fewer of them.”
Reeves is understood to be considering a 1% annual levy on the portion of a property’s value above £2 million, which would mean a £3 million home facing a yearly 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 introduced.
Another option reportedly under review is the doubling of the two highest council tax bands, which would also target owners of high-value homes.
The Chancellor’s plans — expected to be confirmed in the November Budget — have already prompted many would-be buyers to pause or abandon purchases, triggering price falls and a sharp rise in demand for luxury rentals.
Knight Frank’s analysis shows that prices for mansions in prime central London have fallen 8% since 2012, the year the Liberal Democrats first proposed a tax on homes worth more than £2 million.
That debate, though the tax was never implemented, led former Conservative Chancellor George Osborne to raise stamp duty on high-value homes in 2014 — a move that further dampened demand at the top of the market.
Bill warned that the latest speculation risks “repeating history,” adding that the effects could extend beyond London’s wealthiest postcodes.
“Whether the price slide continues into next year depends on whether the Government chooses to repeat history or learn from it,” he said.
The uncertainty has also driven a shift towards the high-end rental market, with demand for luxury lettings climbing 10% in recent months as affluent households prioritise flexibility ahead of the 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 central London lettings at the agency, noted: “For tenants, the gloomier things feel, the more they prioritise liquidity and cash in the bank. That’s supporting strong demand in the lettings 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 ripple through 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 expectations, and London’s prime market to stay under pressure.
The coming Budget, they say, will determine whether this is a temporary correction — or the start of a longer-term shift in Britain’s luxury property landscape.
