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The new council tax will involve a single bill for each household based on two elements - the number of adults living there and the value of the property.
The government's announcement is already being hailed as a major u-turn - coming only a year after the tax was introduced.
It follows massive public opposition, which culminated in a riot in central London in March last year, when 100,000 took part in a rally against the levy.
The unpopularity of the tax is said to have contributed to the downfall of Margaret Thatcher last November. One of John Major's first tasks as her successor was to appoint Michael Heseltine with a view to dismantling the poll tax and introducing a new charge.
Under the terms of the council tax, houses will be allocated to one of seven bands, but it is yet to be decided whether the charge will relate to capital or rental value.
In a 22-minute statement to the House Of Commons, Mr Heseltine said: "In spite of the comprehensive system of income-related rebates, and the reduction scheme we devised, the public have not been persuaded that the community charge is fair.
"The new tax should reflect people's ability to pay, be easy to collect and be seen to be fair."
Under the community charge, everybody made a fixed payment to their local authority, regardless of their means. It will be gradually phased out and replaced by April 1993.
Labour MPs believe the Tories have been forced into a humiliating climbdown.
Shadow Environment Secretary Bryan Gould said: ''We have just heard the most complete capitulation, the most startling U-turn and most shameless abandonment of consistency and principle in modern political history.''
Alan Beith, the Liberal Democrats' Treasury spokesman, supported his comments and said the Government was leaping ''out of the fying pan into the fire'' by combining the principles of the two most unpopular taxes - rates and poll tax.
Meanwhile, many Tory MPs are concerned that the new tax will create losses for many people, offsetting any electoral gains for those hit hardest by the old poll tax.
Southern Conservative MPs also claim that the property element will mean big losses for their constituents.
But Mr Heseltine argued that regional variations in property prices would not be allowed to produce disproportionate bills.
The Chancellor of the Exchequer Norman Lamont has tried to ease the current burden created by the poll tax by raising VAT in the budget this week in order to reduce bills by an average of £140 per head.
The move has caused chaos for local councils who must now recall many bills that have already been sent out.
Further details of the property tax will be unveiled after Easter.
The council tax was introduced in 1993. The charge was payable by all adults and was made up of the property value and the number of adults living in it.
But in 2003 anger at the big increases in council tax bills led to mass protests - mainly by pensioners, many of who refused to pay the average 12.9% increases.
All three main political parties have pledged to either reform or replace the council tax to make it fairer to all.
The Labour Government wants to retain the property-based tax but reform it, possibly by introducing a greater number of council tax bands.
In 2005, with the prospect of a general election looming, the Conservatives promised to reduce council tax bills for pensioners.
The Liberal Democrats want to scrap the tax and replace it with a form of local income tax.
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