Mansion tax fears prompt slump in London house prices

Fears of a mansion tax have dragged down house prices at the top of the London market at the fastest rate in more than four years.

The average price of so-called “prime” houses in the capital has slumped by 4pc in the year to October, according to the latest figures from estate agency Knight Frank, marking their steepest drop since February 2021.

Tom Bill, head of UK residential research at Knight Frank, blamed “prolonged tax speculation” for the fall.

“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.”

Homeowners are bracing for a tax on expensive homes in the Budget. Rachel Reeves is considering a mansion tax that would impose a 1pc levy on the portion of a property’s value surpassing £2m in the upcoming Budget. It would mean owners of a £3m home would face a tax bill of £10,000.

Knight Frank has estimated that just over 150,000 properties in England and Wales would be hit by the proposals.

Another option being looked at is a doubling of the two highest bands of council tax.

Mr Bill said: “Whether the price slide in prime London markets continues into next year and the number of ‘mansions’ shrinks further depends on whether the Government chooses to repeat history or learn from it.”

He noted that average mansion values in prime central London have dropped by 8pc since 2012, which was the year the Liberal Democrats first proposed a tax on properties over £2m.

“Ironically, it was the original mansion tax plan that helped deflate the market,” said Mr Bill.

“It was never introduced but prompted Tory chancellor George Osborne to increase stamp duty for high-value properties in December 2014, and demand in prime markets has never fully recovered.”

Protracted uncertainty around the Budget also caused a 10pc spike in demand to rent a high-end property, rather than buy.

Average rents in prime central London rose 1.9pc in the year to October, the biggest increase since August 2024. In prime outer London, rents rose by 2pc.

David Mumby, head of prime central London lettings at Knight Frank, said: “For tenants, the gloomier things feel, the more they prioritise liquidity and cash in the bank and that is supporting strong demand in the lettings market.”

The Treasury was contacted for comment.

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