FAMILIES relying on tax credits and housing benefit are set to be the biggest losers in this week's budget, as George Osborne begins hacking £12billion from the welfare bill.

Unrestrained by coalition with the LibDems, the Tory Chancellor will also unveil plans to end inheritance tax for all but the very richest households when he addresses MPs on Wednesday.

The threshold for the death duty on family homes will be raised to £1m from April 2017.

The emergency budget, the second this year and the first wholly Conservative one since 1996, is expected to contain the deepest cuts planned by David Cameron's government.

Hoping unpopular measures will be forgotten by the next election, Osborne is expected to double-down on austerity as he tries to eradicate the UK's £90bn deficit by 2018.

Costing £30bn a year - one pound in seven of the entire welfare bill - tax credits go to 4.5m people on low incomes and are likely to be a key element of the Tory cuts.

One influential study suggested child tax credit could be returned to its 2003-04 level to save £5bn, reducing entitlement for 3.7m families by an average £1400 a year.

Labour has warned the minimum wage would need to rise 25 per cent to make up the resulting shortfall, but there is no appetite for that among employers, and no apparent desire among ministers to force bosses to pay staff more.

Scotland's Deputy First Minister John Swinney said he was "particularly concerned" about tax credits cuts.

"Tax credits provide vital support to those in work on low incomes," Swinney wrote in a letter to Osborne last night.

"Seven in ten Scottish households who receive tax credits are working households, and 90 per cent of expenditure on tax credits goes to households with an income of less than £20,000."

Swinney, who is also Finance Secretary, urged Osborne to end his "ideological fixation with austerity" and focus instead on economic growth and those in low pay.

The Tories also plan to cut housing benefit for 18 to 21 year olds, and possibly for under-25s.

Ministers are also considering an end to 100 per cent housing benefit, forcing those who receive it to make pay at least part of their rent.

The household welfare cap, already being reduced from £26,000 to £23,000, may be cut to £20,000 outside London, an option known to interest Osborne.

Offsetting the cuts, Osborne is tipped to increase the personal tax allowance, and "encourage" - though not compel - employers to pay the minimum wage.

He will also continue his squeeze on wealthy "nom doms", charging foreigners more to avoid paying UK tax on their overseas income.

In a joint newspaper article with Cameron yesterday, the Chancellor said he would deliver the Tory manifesto promise to exclude family households worth under £1m from inheritance tax.

The threshold is currently £375,000, or £650,000 for couples.

However from 2017, there will be an additional tax-free allowance of £175,000 per person (£350,000 for couples), covering their main property, even if they sell it to downsize.

The change will allow a couple to pass a home worth up to £1m to children or grandchildren tax-free, a move the Treasury admits will benefit "high income and wealthier households".

Only 6 per cent of estates paid the tax last year, although rising house prices, especially in London and the South East, are expected to double that by 2019.

The policy will be funded by limiting pension tax relief for those earning over £150,000.

"It can only be right that when you've worked hard to own your own home, it will go to your family and not the taxman," Cameron and Osborne wrote.

The pair also announced plans to build discounted homes for first-time buyers under 40 and use public land for homes.

Half of Tory MPs want Osborne to cut top rate income tax for those earning over £150,000 from 45p to 40p, a £1bn move blocked by the LibDems in 2012.

However cutting taxes for millionaires while slashing benefits for the poor may be too hard a sell even for Osborne, especially if he wants to be Prime Minister after Cameron.

In his letter to the Chancellor, Swinney called for the welfare benefit cap to stay at its current level and for automatic housing benefit entitlement for 18 to 21 year olds to carry on.

He repeated his call for a rethink of Tory plans to end onshore wind farm subsidies, and asked for more financial incentives for the struggling North Sea oil and gas industry, including a promise of no oil tax rises for the full parliament.

Scottish Labour leadership hopeful Ken Macintosh yesterday said he would make the party "resolutely anti-austerity" if he was in charge.