Presenting his half-yearly update on the country's finances on Wednesday, Osborne said the Stamp Duty tax would be lowered for the majority of home buyers while those buying houses at the top end of the market would have to pay more.

The increase for the most wealthy could help neutralise the challenge from the opposition Labour party, currently just leading the Conservatives in opinion polls, who have promised to introduce a levy, dubbed a 'mansion tax', on properties worth more than 2 million pounds.

With house prices rising by nearly 10 percent in the past year, and twice that in London, housing has become a key battleground in the election due next May with many homebuilders being pushed into higher tax bands.

"Ninety-eight percent (of people) pay less and the whole reform represents a tax cut of 800 million pounds per year," Osborne told the parliament.

Stamp duty was previously levied according to the total value of a home or land at a rate that increased in stages, resulting in big jumps in the tax paid when a property moved over each threshold.

Under the new plans the tax rate would be graduated and apply only to the part of the property price that falls within that band. The rates of tax would also change.

The tax will start at 2 percent on the portion of a property from 125,000 pounds to 250,000 pounds, 5 percent from 250,001 to 925,000 pounds, then 10 percent up to 1.5 million and 12 percent above that level.

The 12 percent rate compares to the previous top level of 7 percent for homes over 2 million pounds, meaning that buyers of the most expensive properties in Britain, those costing over 937,000 pounds, will now pay more.

The Office for Budget Responsibility said the new rules would result in a drop of 400 million pounds in stamp duty revenue this tax year, and 800 million pounds next year.

The average property asking price in Britain was below 250,000 pounds at the start of the year, according to property website Rightmove, rising to just under 270,000 pounds in November.

Head of Taxation at the Association of Chartered Certified Accountants Chas Roy-Chowdhury told Reuters that Osborne had taken a significant step to addressing a long-standing complaint.

"To make it progressive is something that we've been asking for absolutely years and years and never expected it to happen," he said. "It's a move in the right direction to make it fairer."

Share prices in several house builders edged higher on the news while shares in London-focused estate agents Foxtons (>> Foxtons Group PLC) and house builder Berkeley (>> Berkeley Group Holdings PLC) fell.

(Reporting by Costas Pitas; editing by Stephen Addison/Ruth Pitchford)

By Costas Pitas