George Osborne has drawn up plans to allow parents to leave homes worth up £1 million to their children without paying inheritance tax, according to leaked Treasury papers.
The Guardian reported that it had seen documents which showed the inheritance tax bill on properties worth up to £2 million would be cut by £140,000 under the scheme.
The papers, marked "sensitive", note the plan - which would cost the Exchequer almost £1 billion a year - would "most likely benefit high income and wealthier households".
It estimates that by 2019-20, around 20,000 fewer estates a year would be liable for any inheritance tax at all.
It is understood the measure will not feature in Mr Osborne's final Budget of the current parliament tomorrow but could be taken up by the Conservatives if they regain power in the general election in May.
The scheme is said to involve the creation of a new tax free band worth £175,000 per person on a family home, that could be transferred between married couples making it worth a maximum of £350,000.
It would then be added to the existing inheritance tax threshold, where no tax is paid for the first £325,000 on the value of an estate - an allowance that can also be transferred between married couples making it worth £650,000.
The paper, written by officials for the Conservative Treasury minister David Gauke, notes the scheme will be "very popular with the public and in the media".
"It will allow you to say you are exempting those with modest homes from inheritance tax (with up to £1 million of assets) exempted in certain circumstances," the paper states.
"This reflects the concern raised by the public about rising house prices increasingly leading to estates with a modest house particularly in London and the south east paying inheritance tax."
A Treasury spokeswoman said they had no comment on the report.
Business Secretary Vince Cable told the BBC: "This is an old chestnut that's wheeled out before every election. It's very cynical.
"Given what we've just said about the pressures on the Budget, if taxes can be cut - and it's very difficult within the present Budget constraint - we've got to start at the bottom with people on low pay, not at the top."
The MP for Twickenham added: "I represent a lot of people who are concerned about inheritance tax and they want to pass on property to their children. I understand the human instinct behind it.
"But the Budget is under a lot of financial pressure and this is sending a very bad signal about the Chancellor's priorities."
Prime Minister David Cameron dismissed suggestions that the idea had been blocked by his Liberal Democrat coalition partners.
"That's not the case. This isn't a Budget leak. It's not something in the Budget and you'll see the Budget tomorrow," he said.
But Deputy Prime Minister Nick Clegg, who was accompanying Mr Cameron on a visit to a major transport project to make a joint announcement about rises in the minimum wage rate, said the move would only benefit the very wealthiest and was typical of a top-down Tory approach.
"On tax, all parties need to speak for themselves but I think the Liberal Democrats have emerged as by far the most consistent party in British politics," he said.
"I have been in coalition with the Conservatives now, and they want to fiddle around on inheritance tax - only benefiting the very wealthiest, they want tax breaks to give up your employment rights in return for shares, and then they wanted to introduce a tax penalty for people who weren't married.
"We have always been very consistent: at a time of scarce resources, because there is no money growing on trees, we have said that every spare penny you can find should be devoted to giving tax cuts to people on middle and low incomes.
"We believe in starting at the bottom and working up, not starting at the top and working down in terms of those who should benefit from tax cuts."
Read more on AOL Money
Budget 2015 predictions
How to help your kids buy a house