Italy’s government reached a deal yesterday to reform an unpopular property tax, easing a source of persistent tension which had threatened to split the fragile coalition of traditional rivals from the left and right.

The Cabinet agreed to abolish the housing tax IMU from the start of next year, Prime Minister Enrico Letta told reporters, replacing it with a new levy known as the “Service Tax”.

The two instalments of IMU on principal residences which were due in September and December 2013 will be scrapped, Letta said after the Cabinet meeting.

Silvio Berlusconi’s centre-right People of Freedom (PDL) party has insisted that IMU on principal residences must be abolished as a price for backing Letta, raising fears that failure to reach a deal could provoke a political crisis.

The tussle over the tax has exacerbated an already bitter political climate caused by Berlusconi’s conviction this month for tax fraud and an approaching vote in the Senate on whether to expel him from Parliament.

Yesterday’s deal removes an immediate headache for Letta, though tensions are likely to emerge over the formulation of the Service Tax which will take its place by combining IMU with another tax on refuse disposal.

What is certain is that Italy’s strained public finances cannot do without the roughly €24 billion currently yielded by IMU, which is also imposed on commercial property and secondary residences such a holiday homes.

“I am happy and satisfied, this is the most balanced solution that could be achieved,” Letta said, adding that details of the Service Tax will be presented along with the 2014 budget in October.

The scrapping of the IMU payments on principal residences due this year will cost around €4 billion.