UK cuts 'buy-to-let' tax break for wealthy landlords, housing shares fall

LONDON (Reuters) - Britain is cutting tax relief on mortgages for wealthy landlords to eliminate some of the advantages they have over people buying their own homes, chancellor George Osborne said on Wednesday.

Landlords who pay higher-rate tax are able to claw back 45 pence in every pound of mortgage interest they pay, Osborne said, which had contributed to a rapid growth in buy-to-let properties.

"Buy-to-let landlords have a huge advantage in the market as they can offset their mortgage interest payments against their income, whereas homebuyers cannot," he said, adding that buy-to-let mortgages now accounted for more than 15 percent of new mortgages.

Osborne said interest tax relief would be restricted to the basic rate of tax, which is currently 20 percent, with the change introduced over four years from 2017.

The move hit shares in house builders, with more than 1.5 billion pounds wiped from the value of the eight biggest.

"The crash in values today virtually wipes out all the gains made since the Conservative-won election in May," said Neil Shah at Edison Investment Research.

Barratt Developments (BDEV.L), Persimmon (PSN.L), Taylor Wimpey (TW.L), Crest Nicholson (CRST.L) and Bellway (BWY.L) fell more than 5 percent.

Property website Zoopla Property (ZPLAZ.L) and estate agent Foxtons (FOXT.L) were trading more than 4 percent lower on Wednesday afternoon.

Deloitte real estate tax partner Phil Nicklin said the budget changes would hit buy-to-let landlords hard.

"A landlord who borrows at even a modest level might end up paying more in tax than he makes in profit," he said. "This measure must make buy-to-let investment a less attractive proposition in future and may reduce the options for those who see it as an alternative to a pension."

Analysts at UBS said that, disappointingly, it was the first budget for some time with negative impacts on the housing market after a series of very positive policies over recent years such as the "help to buy" scheme, which helps homebuyers secure mortgages.

(Reporting by Paul Sandle; editing by Stephen Addison)