The Mayor of London is calling on the Government to change the tax rules to encourage elderly people to downsize to smaller homes.

Boris Johnson says people over the age of 65 should be excused from paying inheritance tax when they sell their homes. He says this will make them more inclined to move to smaller retirement properties and provide more family homes for estate agents to sell in order to meet the high demand in London.

He said many old people stay put in homes that are too large for them because of the considerable chunk of their profits they would lose to the taxman.

The idea for an inheritance tax reduction or exemption for elderly people has already been suggested to ministers, according to the deputy mayor for housing, Richard Blakeway.

Speaking to the Times Mr Blakeway said older people who decide to move should receive tax benefits. He said those thinking of selling up and moving somewhere smaller often fear what will happen to the money they receive.

At the moment all properties that are sold for more than £325,000 incur a 40% inheritance tax bill. Mr Blakeway says it is no wonder that people are not selling up when they lose that much money and the system needs to be looked at.

A good alternative to making over 65s exempt of inheritance tax would be scrapping stamp duty when downsizing, he suggests.

Stepanie McMahon, Head of Research at Strutt & Parker said: “Although clearly at an early stage, a fiscal incentive to create greater liquidity in the housing market and give owners comfort about the future of their estate would be welcome. Under-occupation is one of the greatest challenges in the housing market today with 47% of all home under-occupied in England & Wales. There is a vast difference though, both in monetary terms and in terms of behavioural lever, between exemption of inheritance tax and exemption from Stamp Duty Land Tax. To truly understand implications, the policy needs much more thought and detail.”

It seems the idea, included in the Mayor's London housing plan but remains in its infancy, is new to the Treasury. A spokesperson revealed that Treasury ministers are not considering it.

To back the idea, Mr Blakeway pointed to research that suggests there are currently around a million people older than 65 living in London and the figure is likely to increase by a half by 2036, when 90,000 of them will be 90 or older.

Mr Johnson has pushed to have more powers ever since he became the Mayor of London in 2008 and has suggested the money made in stamp duty on property in the capital should be used to fund new infrastructure projects. It is thought he is keen to make a return to Westminster in next year's General Election.