TENSIONS between allies of Tony Blair and Gordon Brown burst into the open again yesterday after a leading Blairite called for a shake-up of the Chancellor’s tax plans.

Stephen Byers, the former Cabinet minister and a supporter of Mr Blair, called for inheritance tax to be abolished, saying that rising house prices were making the estates of the middle classes liable for big tax bills.

This would send a powerful signal to such families that new Labour would not abandon them once Mr Blair left office and show that his “pragmatic and modernising” policy agenda would live on, he argued.

Mr Byers, a political enemy of the Chancellor, encroached further on to his territory by calling instead for higher environmental taxes, saying that the proportion of green taxation had slipped from 3.6 per cent to 2.9 per cent in seven years.

Mr Brown’s supporters launched a swift counter- attack, dismissing Mr Byers’s proposal in terms usually reserved by Labour for assaults on the Conservatives during election campaigns.

Alistair Darling, the Trade Secretary and a friend of the Chancellor, told BBC News 24: “Inheritance tax brings in about £3 billion a year. If you get rid of it, it follows that some other tax has to go up or you have to cut some public spending, on health and education and so on.

“Ninety per cent of estates don’t pay it, it is paid by 6 per cent, and I don’t think this proposal really has much support across the political spectrum. The Tories and the Liberals have looked at it and backed off from it. It may make for a headline, but I don’t think it makes for a prudent and sensible tax and spend policy.”

Mr Byers insisted that he wanted to debate policies and not personalities, pointing out that, in a string of marginal seats that Labour must defend at the next election, average house prices were higher than the threshold of £285,000 for paying inheritance tax.

But he explicitly linked his proposal to the search for a new Labour agenda after Mr Blair departs and, in one interview on Radio 4’s The World At One, he interrupted the presenter to challenge the assumption that Gordon Brown would be Labour’s next leader.

The renewed in-fighting between the Blair and Brown camps comes as the Prime Minister, still on holiday in Barbados, faces growing pressure in the Labour Party to indicate before the party’s conference in late September whether it will be his last as leader.

There are signs, however, of better relations among the new generation of younger ministers close to both men who have been working together to hammer out radical policy ideas to reinvent the modernising appeal of new Labour.

The group includes Blairites such as James Purnell, Jim Knight, Andy Burnham, Liam Byrne and Jim Murphy, and also Ed Balls and John Healy, close supporters of Gordon Brown, with a shared agenda to take forward the modernising credentials of new Labour.

They have begun publishing a series of pamphlets and online articles to stimulate discussion on reformist policies in advance of the conference.

One of the group told The Times that it should come as no surprise that allies of the Chancellor were involved since Mr Brown was one of the founders of new Labour.

The minister said: “G. B. is clearly new Labour and it needs to be developed and a new set of ideas needs to be brought forward based on our experience in government.”

Mr Purnell, the Pensions Minister, has published a long article on eustonmanifesto.org, a website for the progressive Left, on the case for competition and choice in public services. Mr Knight, the Schools Minister, plans to post an article on the same website making the case for further choice in education based on trust and specialist schools being backed by trade unions, parents’ cooperatives, environmental organisations or the armed forces.

Those close to the group pointed to a pamphlet published last month by Ed Balls and John Healy, both Treasury Ministers, with Chris Leslie, a former Labour MP also an ally of the Chancellor, on regional policy and decentralisation.