LONDON (Reuters) - The British Property Federation (BPF) welcomed an amendment to a government finance bill that mitigates the penalty for Real Estate Investment Trusts (REITs) in breach of gearing restrictions for reasons outside their control.

British tax authorities would have discretion to waive the tax penalty in cases where a REIT was in severe financial trouble and could not reasonably avoid breaching its required profit to financing costs ratio level of 1.25 to 1.

Previously, the charge would have been a corporation tax of 28 percent, paid on the excess financing charges.

BPF said REITs could have found themselves breaching the ratio by repaying debt early, renegotiating financing deals, or if profits fell because interest rates rose and rents dipped.

Peter Cosmetatos, BPF's director for finance, said the amendment to the bill showed common sense had prevailed.

"We argued that the restriction should not give rise to a tax charge other than in cases where a REIT had taken on excessive debt or its investors use debt to extract their return, reducing the property distributions on which the Revenue collects withholding tax," Cosmetatos said.

Phil Nicklin, a real estate tax partner at Deloitte, said the interest rate cover ratio was conceived during a property boom and was not necessarily appropriate in a crash.

"REITs that renegotiate their debt are having to pay penal rates of interest, which might mean they exceed the interest cover ratio," Nicklin said.

"To add insult to injury, they have to pay a tax penalty on that excess which could cause financial hardship," he said.

(Reporting by Andrew Macdonald; Editing by Dan Lalor)