Parents may be able to leave homes worth up to £1 million to their children without paying inheritance tax, according to leaked Treasury papers.

The Guardian reports that it has seen documents, which also show that the inheritance tax bill on properties worth up to £2 million would be cut by £140,000 under the scheme. See's Inheritance Tax guide to save £100,000s on death duties.

The papers, marked "sensitive" suggest it would "most likely benefit high income and wealthier households" with estimates showing that by 2019-2020, around 20,000 fewer estates a year would be liable for any inheritance tax at all.

It would reportedly cost the Exchequer almost £1 billion a year, although it is understood the measure will not be a part of George Osborne's final Budget tomorrow, but could instead be taken up by the Conservatives if they regain power in the general election in May.

How would it work?

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 in total.

The paper shows that by adding the existing maximum allowance of £650,000 to the new maximum relief of £350,000, properties up to £1 million could escape inheritance tax altogether.

'Reflects the concern raised about rising house prices'

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 had no comment on the report.