As many as 5,000 London flats are thought to have been sold off the plan to investors hoping for a 40 per cent tax rebate after placing the property in a self-invested personal pension (Sipp).

But on Monday the Chancellor backtracked on his own rules before they were to come into affect on April 6 next year. Residential property placed within a Sipp would not, as he promised two years ago, qualify for tax relief, he said.

Alastair Stewart, a property analyst at Dresdner Kleinwort Wasserstein, said that he had been told by top London estate agents that “considerable” numbers of investors had put deposits on off-plan properties that they intended to place in their Sipps as buy-to-lets. The typical deposit for such a property is 15 per cent of the asking price.

“They’re not going to complete,” he said. “I’ve heard from various places today that people are in an absolute panic about it.”

The North West of England, another popular area for off-plan buy-to-lets, was also affected, Mr Stewart said. As many as 20,000 people across the UK are thought to have purchased property with the intention of using it for retirement savings.

Berkeley Homes, the housebuilder, was about to launch a buy-to-let property Sipp with financial services providers including the mortgage broker John Charcol, Hargreaves Lansdown, the financial adviser, and Douglas & Gordon, the estate agent.

But mortgage brokers have given warning that the market for new-build buy-to-lets is overheated, with prices soaring above the true value of the properties.

The Mortgage Works, the broker owned by the Portman Building Society, said on Monday that it would no longer give buy-to-let mortgages on newly built properties, but only on those aged one year or more. The broker said that the market was overheated, with developers doing deals on the property price that, in effect, defraud lenders.

Matthew Wyles, group development director at the Mortgage Works, said: “Owing to the current oversupply of newly built property, valuation in this sector is more of an art than a science . . . We’ll go back into new-build buy-to-let when we believe that the market forces of supply and demand have reached equilibrium”.

Charles Suchett-Kaye, a partner at Reynolds Porter Chamberlain, the law firm, said that some investors who had become caught up in the Sipps hysteria and bought off-plan residential property may want to sue the financial advisers who recommended the investment.

MORTGAGE RISE

• Value of buy-to-let mortgages outstanding in 2004: £52.2 billion
  
  
• Value of buy-to-let mortgages outstanding in 1999: £5.2 billion
  
  
• Increase in number of buy-to-let mortgages outstanding from 1999 to 2004: 718 per cent
  
  
• Increase in October of consumers approaching moneysupermarket.com for advice on buy-to-let mortgages: 25 per cent
  
  
• Percentage of all mortgages that are buy-to-let mortgages in arrears: 0.7 per cent
  
  
• Top five buy-to-let mortgage lenders in the UK: Mortgage Express, Birmingham Midshires, The Paragon Group, Cheltenham & Gloucester, Bristol & West