Limiting the tax relief that debt attracts could have a disastrous impact on the economy, according to the British Property Federation (BPF).

It is concerned that if the relief against Britain’s legacy of debt is removed, many borrowers currently making their interest payments may no longer be able to do so, forcing the banks to call in thousands of loans. That would that put some borrowers out of business and could give rise to substantial new losses on bank balance sheets.

A round of repossessions and sales of commercial property by lenders would push down commercial property values – currently 36% below their 2007 peak – placing even greater strain on the balance sheets of both property owners and those who have lent against property, the BPF has warned.

Currently around £150 billion of commercial property debt is held by the state-backed Royal Bank of Scotland and Lloyds Banking Group.

There is around £300 billion of debt just against commercial property, and hundreds of billions more of ordinary business lending which is secured on borrowers’ premises. So far, however, many banks are turning a blind eye to breaches of loan-to-value covenants which alone make up about £50 billion, the BPF says. This is because many borrowers are able to afford repayments despite massive drops in the value of their assets.

Liz Peace, chief executive of the British Property Federation, said: “Restricting tax relief for financing costs could be the last straw for many businesses that are managing to make their interest payments in challenging conditions. Halving relief would increase the true cost of debt service by between 16% and 20%