Rivals Rishi Sunak and Liz Truss will fight it out to become the next Prime Minister.
The former Chancellor and Foreign Secretary narrowly knocked Penny Mordaunt out of the Tory leadership race on Wednesday.
Mr Sunak received 137 votes from Tory MPs to be their next leader, while Ms Truss was endorsed by 113 colleagues.
Ms Mordaunt, who received 105 backers on Wednesday, had been second to Mr Sunak in all four previous rounds of voting.
But she was overtaken at the final hurdle after Ms Truss appeared to pick up more support from MPs who had prevously backed Kemi Badenoch.
Ms Badenoch was eliminated on Tuesday with 59 votes.
Mr Sunak and Ms Truss will now face a campaign to win the votes of Tory members, with the result of the contest announced on September 5.
The winner is expected to replace Boris Johnson as prime minister the following day.
Bookmakers have made Ms Truss the favourite to win the contest but following the result, Mr Sunak, the frontrunner throughout the parliamentary leg of the contest, said he was best placed to beat Labour’s Sir Keir Starmer at the next election.
He said: “We need to restore trust, rebuild the economy and reunite our country.
“I’m confident that we can do that and we've got a really positive message to take out to all our members now - crucially, who is the best person to beat Keir Starmer and the Labour Party at the next election?
“I believe I’m the only candidate who can do that.”
Ms Truss said she was “excited” to lay out her plans for the Conservative Party.
“As Prime Minister I would hit the ground running from day one, unite the Party and govern in line with Conservative values,” she said.
“I am incredibly proud to be a part of the Conservative and Unionist Party and am excited to spend the next few weeks proving to all of our brilliant members exactly why I am the right person to lead it, and our great nation.”
The Tory party announced 12 locations across the UK where they will hold public hustings between the final two, with the first being in Leeds on July 28.
They will visit Cardiff, Perth, Northern Ireland, Manchester and Birmingham in the following weeks before the final hustings in London on August 31.
First they will take part in a televised BBC debate on Monday, and they have also signed up to a Sky head-to-head on August 4.
The pair have to curry favour with some 160,000 eligible Conservative party members who will vote for their favourite to become PM.
Ballots are being sent out to the membership who have until September 3 to vote.
Despite obvious tensions between the two contenders during TV debates last week, one Mr Sunak supporter called for a respectful contest between the former Chancellor and Ms Truss, adding that the two campaigns were likely to talk to each other about how the five week race will be conducted.
Some Tories fear the damage further public rows will cause to the party.
However, the Sunak supporter added that there would be a “robust policy debate” between the candidates and some of the policies Ms Truss has been setting out were “not being honest with people”.
“We are very pleased Rishi is in the final two with a clear lead,” they said.
“He will now take his campaign top people in the country,” the supporter said. Mr Sunak, they said, would focus on restoring trust, rebuilding the economy and dealing with the international situation.
“He appeals to people who voted leave and remain and all parts of the UK….members will conclude he is the best person to lead the party and be Prime Minister.”
Truss-backer Sir Iain Duncan Smith said it would have been a "dereliction of duty" for her to leave Mr Johnson's Government, in a possible jibe at Mr Sunak, whose resignation helped secure his downfall.
Sir Iain, a former Tory leader, insisted Ms Truss was not the "continuity" candidate and said he has "no idea" whether she has Mr Johnson's support.
"Liz Truss stayed in the Cabinet, she had a very important job, it was Foreign Secretary, we've got a war going on in Ukraine, and a serious crisis, it would've been a dereliction of duty for her to have abandoned it and then promptly decided to get rid of him," Sir Iain told BBC Radio 4's PM programme.
"The truth is she was straightforward and loyal on that, and I think that was the right way to be."
Ms Mordaunt congratulated her two rivals as she conceded.
"Politics isn't easy. It can be a divisive and difficult place," she said.
"We must all now work together to unify our party and focus on the job that needs to be done."
In his final Prime Minister's Questions appearance, Mr Johnson offered advice to his successor and what appeared to be a swipe at his former chancellor.
The Prime Minister has not publicly backed any of the candidates, but some of his closest allies have supported Ms Truss.
Mr Sunak has said further tax cuts could only be delivered when inflation is under control and the public finances allow it, but Ms Truss has pledged to "start cutting taxes from day one".
Mr Johnson's advice was to: "Cut taxes and deregulate wherever you can and make this the greatest place to live and invest, which it is."
He added that the new prime minister should be prepared to ignore their chancellor: "I love the Treasury but remember that if we'd always listened to the Treasury we wouldn't have built the M25 or the Channel Tunnel."
Mr Sunak's resignation helped trigger the revolt against Mr Johnson which ultimately led to him accepting he had to quit No 10.
The Prime Minister said his successor should "focus on the road ahead, but always remember to check the rear-view mirror".
