The electorally-sensitive plan was instead relegated to an annexe of options in a Green Paper before the party's spring conference.
One member of the working group, Richard Darlington, said he was 'dismayed' that ending tax relief for existing mortgage holders had been 'taken out by someone in a greater position of power'.
Nigel Jones MP, the party's housing spokesman, emphasised that mortgage interest tax relief (MITR) would be maintained for existing borrowers while a new benefit would replace MITR for future home-buyers.
The difference between this policy and the party's position at the last general election lies in the form of benefit to help home-owners. Rather than the 'housing cost relief' scheme proposed in 1992 for owners and tenants on low income, it supports a system of benefit devised by the Institute for Fiscal Studies considered simpler to run and better for low-income owners.
Mortgage benefit could be merged with housing benefit, saving some pounds 230m in administrative costs to set against a benefit cost of pounds 1bn.
'Given a revival in the housing market, the immediate ending of MITR could save pounds 5.2bn in the first year, making way for a reduction in the basic rate of income tax of 2.5p in the pound,' the report said.
Mr Darlington, from South-west Cambridgeshire, whose criticisms were backed by another member of the working group, said the current position was indefensible. 'No explanation is given as to how this would work.'
Defending the retreat, Mark Hayes, chair of the working group, acknowledged the disappointment of some members but said policy on MITR could not be changed without reforming overall taxation policy.Reuse content