Due to come into force for social tenants in April 2019, the Department for Work and Pensions (DWP) proposals would have seen LHA payments or the housing element of Universal Credit limited to that of the shared accommodation rate after April 2019.

Housing associations and charities had warned the plans would force them to shelve developments, and a recent report by CIH Scotland revealed that around 12,000 social tenants across Scotland aged under 35 could collectively face an annual rent affordability gap of up to £8.6 million when the cap on housing benefit came into force.

However in a U-turn hailed by campaigners as a “victory for the housing sector”, the plans to introduce the LHA cap for both general needs social housing and supported housing will be dropped.

The government intends to publish a response to the consultation on supported housing on October 31.

Making the announcement during Prime Minister’s Questions yesterday, Theresa May said: “I can confirm that we will be publishing our response to that consultation on Tuesday 31 October, it will look at a wide range of issues, it will need to make sure the funding model is right…we need to look at issues such as the significant increase in service charges…but I can also say today that as part of our response to the review we will not apply the local housing allowance cap to supported housing.

“Indeed, we will not be implementing it in the wider social rented sector and the full details will be made available when we publish our response to the consultation.”

Welcoming the announcement, CIH Scotland policy and practice manager, Ashley Campbell, said: “This change in policy by the UK government is great news. CIH Scotland has consistently called for a rethink on UK government plans to cap housing benefit for people living in supported housing at Local Housing Allowance rates, because it would have put homes for some of the most vulnerable people in our society at risk.

“The results of independent research we recently published in partnership with the Scottish Government clearly showed the full scale of the potential impact this policy would have on social tenants aged under 35 across Scotland. The government has clearly listened to widespread concerns here in Scotland and throughout the UK. We will await further details of the new funding proposals with interest.”

Jeremy Hewer, policy advisor at the Scottish Federation of Housing Associations (SFHA), added: “The announcement appears on the face of it to be very welcome and thanks to the help of members who provided data and case studies on the potential impact of the LHA cap, the SFHA has been able to make a strong case in collaboration with other organisations – Homeless Action Scotland, Scottish Women’s Aid and the HSEU – for the government’s proposals to be set aside.

“We are yet to see the details of the Government’s consultation on supported housing, so there may yet be concerns to which we will need to respond, in particular into Universal Credit’s interaction with Supported Housing.”

Among the most vociferous opponents to the cap was Homeless Link.

The charity’s chief executive Rick Henderson said: “The Prime Minister’s announcement marks a significant victory for the supported housing sector and the thousands of vulnerable individuals it supports. Homeless Link, working with our members, has campaigned tirelessly for the government to drop their highly controversial plans to apply the LHA rate to supported housing, and are pleased that our concerns have been listened to. The proposals were not fit for purpose and would have put a large number of supported housing schemes at risk of closure, with dreadful consequences for the people who live there.

“As always, the devil will be in the detail and we await the government’s consultation response, which will reveal how they intend to progress. We must be certain that the revised plans work for the full range of vital supported housing services, and look forward to continued collaboration with our members and with government to ensure we secure a sustainable future for the supported housing sector.”

Home Group has announced it will invest £50m into supported housing following the news.

Rachael Byrne, executive director, new models of care at Home Group, said: “Today’s announcement that all Local Housing Allowance caps for all supported and social housing would be scrapped is fantastic news and really puts the whole of the supported and social housing sector on a long-term sustainable footing.

“Home Group is delighted to announce that, as a result, today we approved an investment of £50m to bring forward three new supported housing and health schemes in Southampton, Calderdale and Scarborough. Together these will support an additional 247 vulnerable people.

“This is evidence that the government recognises the impact that our sectors’ deliver, in providing high quality affordable and supported homes. It is a strategic priority for Home Group to continue to offer high-quality integrated supported housing that represents value for money, and this announcement gives us the certainty and therefore confidence we need to deliver the further 1,800 supported homes we have planned.

“We had also anticipated that 264 of our general needs customers had been affected by the capping of housing benefit at local housing allowance, with a further 1,211 customers under the age of 35 who could be affected by the shared accommodation rate. This announcement gives these customers the certainty they need over their future income and means we can go forward with confidence in delivering 10,000 new homes.”