Under the current system, councils are required to pay council house rents and the majority of receipts from any sales of land or homes to Whitehall, who then decide how best to redistribute it back to councils.
But under the proposed new rules, rather than the current Housing Revenue Account subsidy system councils would instead keep all the rents and sales receipts they collect.
In return for this greater freedom, some councils would take on additional housing debt – but no council will take on a level of debt that is not sustainable for the long term.
Details of the new system will be announced as part of the Spending Review on 20 October and will be introduced as part of the Localism Bill being introduced this autumn.
These reforms can only be effectively delivered through a comprehensive and legally binding settlement achieved through primary legislation. The minister is therefore ruling out a voluntary deal ahead of securing the powers in the Localism Bill.
In the period leading up to implementation of the new system, the overall approach for transfer proposals that have yet to be put to a tenant ballot will be a value for money and delivery test against the costs and benefits of the reformed system.
Housing Minister Grant Shapps said:
"For far too long councils have been left hamstrung in their efforts to meet the housing needs of their residents by a council house finance system that is outdated and no longer fit for purpose. The Housing Revenue Account subsidy is in urgent need of reform.
"That’s why I can confirm that we intend to scrap the current system, and instead replace it with something more transparent that will serve the needs of local communities without interference from Whitehall.
"Subject to the Comprehensive Spending Review we will offer councils the opportunity to keep the rents they collect and the receipts from any house or land sales. This is a key step to transfer powers to councils and communities, so they are free to improve their local services in a way that best meets the needs of local people."
Sarah Webb, CIH Chief Executive, said: “We are delighted that the Housing Minister has confirmed his intention to replace the current unfair and archaic system of council housing finance. The steps he has announced today will remove a millstone from around the neck of local authorities who have been anxious for a sustainable approach to their housing finances.
“We have campaigned for these changes since 2005 and look forward to the detail to be published with the Comprehensive Spending Review. When councils are allowed to retain the income from rents and house sales we believe they will be able to make better and more locally-based decisions for the benefit of their tenants and the wider community.”
She continued: “We are, however, disappointed that the opportunity for some local authorities to leave the system voluntarily next April has been withdrawn. A number of authorities had been enthusiastic about the chance to exit this unjust system early. Ultimately, however, what matters is that the system will be replaced and the Minister’s announcement today is a giant step forwards”
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