David Cameron and Nick Clegg published a seven-page document detailing the key policy agreements of Britain's first peacetime coalition government since the 1930s.

The document is the first step towards a full coalition deal that will cover the five-year parliament.

The parties have reached agreement on the most difficult areas first and will address less contentious areas in the coming weeks.

In the initial document the parties have agreed:

• Reducing Britain's £163bn fiscal deficit will be the first priority. There will be a "significantly accelerated reduction" in the structural element of the deficit over the parliament.

• Tory plans to raise the threshold for inheritance tax to £1m has been dropped. Plans for a marriage tax break survive but the Lib Dems will be free to abstain.

• A cap on immigration will be imposed after the Lib Dems dropped their plans for earned citizenship for illegal immigrants.

• A referendum on the alternative vote system will be held.

• Tory plans to repatriate the social chapter from the EU have been dropped.

• Educational resources will be directed at disadvantaged pupils.

• A "freedom bill" or "great reform bill" will be introduced to scrap ID cards.

The new foreign secretary, William Hague, described the document earlier as "the best of the Lib Dems manifesto with the bulk of the Conservative manifesto" but the Lib Dems were said to be delighted that so many of their policies made it into the agreement.

Among them was taxing non-business capital gains at rates akin to income tax, meaning the level could raise from 18% to 40%, or even 50%, likely to be of particular concern to owners of buy-to-let properties.

There is also a commitment to a substantial increase in the personal income tax allowance from April 2011, with a long-term aim of raising the threshold to £10,000 in line with Lib Dem policy.

Nick Clegg promised a crackdown on bankers' bonuses throughout the campaign and that is reflected by a pledge of "robust action to tackle unacceptable bonuses in the financial services sector".

In return, the Conservatives have won backing for public expenditure cuts to non-frontline services to the tune of £6bn this year. The Lib Dems had previously backed Labour in advocating holding off cuts until next year. The new energy and climate change secretary, Chris Huhne, said public expenditure cuts were the issue on which the two parties had the widest gap, suggesting it was hard for the Lib Dems to swallow.

But he added: "I don't think there was ever as much difference [with the Conservatives] on that issue, frankly, as was sometimes painted."

And the agreement on cuts this year are "subject to advice from the Treasury and the Bank of England on their feasibility and advisability".

The Lib Dems will be allowed to abstain on any vote implementing the recommendations of the Browne report on higher education funding (ie higher tuition fees) if they disagree with them.

The agreement contains a Lib Dem manifesto pledge to scrap compulsory retirement ages and there will also be a review to set the date at which the state pension age starts to rise to 66, although it will not be sooner than 2016 for men and 2020 for women.

It also promises: "We will restore the earnings link for the basic state pension from April 2011 with a 'triple guarantee' that pensions are raised by the higher of earnings, prices or 2.5%, as proposed by the Liberal Democrats."

The document confirmed the parties had agreed to a fixed five-year term parliament but with a proviso that it could be dissolved earlier if 55% (in effect all Lib Dem and Tory MPs) voted earlier, and the proposals from the Wright committee for the reform of Commons procedure will be implemented in full.

They have also agreed to a commission to address the "West Lothian question" – the fact that Scottish, Welsh and Northern Irish MPs can vote on issues that affect England despite English MPs not having the same rights over their regions, which are now governed by assemblies.

While it will be no surprise that there is no provision for an amnesty (or route to citizenship, as the Lib Dems labelled it in their manifesto) for illegal immigrants, given Tory attacks on the plans during the election campaign, a much-criticised Labour policy that the Lib Dems had promised to scrap, the detention of children for immigration purposes, is to be ended.

The document states both parties' manifesto commitment not to allow a third runway at Heathrow, which put both of them at odds with Labour.

On Europe, seen to be a potential flashpoint between the parties, there is an agreement on "no further transfer of sovereignty or powers over the course of the next parliament".