Ministers have dropped plans for a new local grant fund to pay for councils to provide short-term emergency supported accommodation.
The fund was a key part of proposals set out last October, when Theresa May abandoned former chancellor George Osborne's plan for a cap to cut housing benefit costs in the supported housing sector.
Replacing housing benefit payments to residents, the fund would have taken refuges for those fleeing domestic violence or at risk of homelessness out of the welfare system, with councils instead given a ring-fenced grant to plan and deliver services.
But the Ministry for Housing has now announced that housing benefit will be kept in place for all those living in supported housing, believed to number around 716,000 people in 651,500 properties in Britain.
Around £4.12 billion is spent each year on housing benefit payments for supported housing, representing around 17% of total expenditure on the benefit, which is being rolled up in the new universal credit.
Last year's proposals would also have created a new system of "sheltered rent" for older people in supported housing with extra care needs.
Only those in long-term supported accommodation due to needs like learning or physical disabilities or mental ill health would have continued to receive housing benefit.
Announcing the result of a consultation with providers, stakeholders and councils, housing minister Kit Malthouse (pictured) said: "Protection of the most vulnerable has always been our primary concern, and following our consultation, the case for keeping supported housing in the welfare system became clear.
"The sector also recognised that our aim of improving the quality of homes must be addressed, and we look forward to now working with partners to make sure we have strong measures in place."
The Government also announced that it will work with providers, local authorities, membership bodies and resident representatives over the coming months to develop a robust oversight regime for the sector.
The chair of the Local Government Association's Community Wellbeing Board, Izzi Seccombe, said: "This announcement will give councils and housing providers the certainty to sustain and invest supported housing for some of the most vulnerable people in our communities.
"A sustainable funding model for supported housing is critical to ensuring councils can reduce homelessness and help older and other vulnerable people.
"It is, however, crucial that councils have the leading role in overseeing and ensuring the provision of housing for vulnerable groups is good quality, value for money, and fits in with the wider local services offered in places."
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