Virgin Money says does not expect new bank surcharge to hinder growth

* Analysts say surcharge will hit challenger banks

* Virgin Money CEO says won't curb business growth

* Plans to restructure mortgage business due to tax changes

* Shares (Berlin: DI6.BE - news) jump nearly 10 pct after H1 profit surges (Adds CEO comment, context)

By Aashika Jain

July 28 (Reuters) - British lender Virgin Money does not expect a new bank surcharge to reduce growth in its business overall and will adapt its buy-to-let mortgage business to account for tax changes coming into effect in 2017, its CEO said.

Virgin Money, which counts itself among the bigger challenger banks in Britain and went public in November, reported a 37 percent jump in first-half profit on Tuesday, sending its shares up nearly 10 percent. It was bolstered by a surge in mortgage lending as it expanded its market share to 3.8 percent as of the end of May, from 3.6 percent in the first quarter.

British banks face a new 8 percent surcharge on annual profits above 25 million pounds from January 2016, to replace the balance sheet levy from which so-called challenger banks are exempt. Analysts have said the surcharge could make it more difficult for fledgling banks to challenge the big lenders.

Virgin Money CEO Jayne-Anne Gadhia said the bank's target to deliver a mid-teens percentage return on tangible equity would be delayed by a year to 2017 due to the tax surcharge, but she did not expect the tax to curb business growth.

British Chancellor George Osborne in his budget this month also said tax relief on mortgages for wealthy landlords would be cut from 2017.

Gadhia, who is the first female CEO of a listed British bank, said she did not expect any material impact on Virgin Money's business relating to the new tax regulations as it did not have a high proportion of buy-to-let mortgages. However, it would restructure its mortgage business.

The new regulations are expected to prompt many landlords to let properties via a company to get more favourable tax relief.

"We will be reconstituting our buy-to-let business such that we are able to offer buy-to-let mortgages to landlords who buy their business through corporate entities but that does not mean we'll be moving into commercial mortgages, for example," Gadhia told Reuters in a telephone interview.

Buy-to-let loans account for 16 percent of Virgin Money mortgages, a spokesperson for the bank said.

The lender reported a 44 percent surge in gross mortgage lending for the first-half ended June 30 to 3.6 billion pounds, but said a competitive mortgage market put pressure on asset spreads in the first half of 2015, which would continue in the second half.

Shares in Virgin Money surged as much 9.5 percent after its results and have now risen about 32 percent since listing in November.

The bank said underlying net interest margin for the first half rose to 1.65 percent, from 1.43 percent last year, and it posted a nearly 28 percent jump in net interest income for the period to 220.3 million pounds.

British lawmakers and regulators want to break the dominance of Lloyds Banking Group, Royal Bank of Scotland (LSE: RBS.L - news) , Barclays Plc (LSE: BARC.L - news) , HSBC and the British arm of Spain's Santander. (Reporting by Aashika Jain in Bengaluru; Editing by Anupama Dwivedi and Susan Fenton)