UK Chancellor George Osborne has announced that the government will extend capital gains tax to cover all property sold after April 2015 in the hope it will ease the pressure on house prices in the capital, which have risen by 10% in the last year.
Currently, UK residents pay capital gains tax on profits on property that is not their main residence, but foreign-based nationals are exempt.
Overseas investors - mainly from Asia and the Eurozone - have been increasingly active in the London property market since the 2007 financial crash, viewing it as a safe way to invest capital with tax-free returns.
Deputy Prime Minister Nick Clegg had signalled the prospect of an expanded capital gains tax due to concerns about the inflationary impact overseas buyers were having on the market, and on the city. Parts of London have become virtual ghost towns as foreign investors buy up property and leave them empty.
According to Land Registry figures, prices in Kensington and Chelsea have shot up by 49% since 2007. In the last year 85% of all £1million+ house sales have been in London and the southeast while in the rest of England and Wales prices have dropped by 8%.
Recently London's most expensive apartment block experienced its first repossession as a one-bedroom flat went back on the market at a price of £5.25million. It was also announced that £30million had been slashed from the asking price for a St John's Wood mansion which is now for sale at the bargain price of £35 million.
However, British households already pay the highest property taxes in the developed world and reaction to the Chancellor's announcement has been mixed.
Jamie Morrison, of HW Fisher & Company chartered accountants, said: "This will eventually bring the overseas investors broadly in line with the UK's landlords and will help raise welcome money for the Treasury while throwing a little cold water over London's overheated property market."
Accountancy firm Ernst and Young was less positive. Its spokesman John Cooney said the changes would "send shivers down the spine of institutional investors. It will be important for the UK's competitiveness that such overseas investors realise that this is a targeted measure and not the first stage of a cash grab by HM Treasury."