Chancellor Alistair Darling has moved to increase the value of assets people can leave behind when they die without having to pay inheritance tax.

As he delivered his first Pre-Budget Report in the Commons, he announced that married couples and civil partners will have a combined inheritance tax threshold of £600,000, rising to £700,000 by 2010.

Inheritance tax is currently levied at 40% on all assets worth more than £300,000 that are left behind when a person dies, rising to £350,000 from 2010, although assets left to a spouse are exempt from the tax.

But Mr Darling's announcement means that married couples and civil partners will be able to combine their allowances, meaning that when the second partner dies, inheritance tax will not be charged on the first £600,000 of their estate, as long as none of the allowance was used when the first partner died.

The new ruling will be implemented immediately and will be backdated indefinitely for every widow or widower, meaning that people who have already lost their partner can still take advantage of the combined allowance.

Mr Darling also said that in the future both house prices and inflation will be taken into account when the inheritance tax threshold is set.

He added that the new allowance is worth more than the value of 97% of homes in the country.

The move is less generous than the Conservatives' recent proposal of increasing the threshold to £1m. But Mr Darling said such a move would cost a further £2bn, with half of this money going to estates worth more than £950,000 - the top 1%.

Patrick Stevens, tax partner at Ernst & Young, said: "I think it is very cleverly targeted and will make a real difference that most families will understand.

"The fact that they are going to take house prices into account, which for many people is their main asset, must be a positive thing."

Clive Mackintosh, head of private clients at PricewaterhouseCoopers, said: "We welcome the transferability of allowances for inheritance tax which will hopefully simplify the system for those families who want to take advantage of these reliefs."

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