please do not take this as fact as i am no legal bod, however i do believe that you can only retaliate of they attack you first, BUT you can ask them to leave, if they refuse then they are tresspassing and "reasonable" force can be used - and with such the avaliability of sharp & heavy items laying about, "reasonable" force could possibly be seen as a bat round the head...
just get your neighbour to witness that he went for you first with a knife!