Proposals to allow local authorities keep the profits from council housing will be introduced later this year under the Localism Bill, housing minister Grant Shapps has announced.
Mr Shapps said the current Housing Revenue Account (HRA) system, which sees the majority of income from council home renting or sale collected by central government, was “no longer fit for purpose”.
Councils will also be given the opportunity to take on additional debt, to a sustainable level, in order to build new homes.
Further details will be announced as part of the Comprehensive Spending Review (CSR) on 20 October ahead of the launch of the Localism Bill.
Mr Shapps said councils had been left “hamstrung” for far too long.
He added: “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 CSR 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.”
Cllr Gary Porter (Con), chair of the Local Government Association’s housing and environment board, said: “Reform of the outdated, inefficient system of housing finance has long been talked about - now is the time for action.
“With more and more people struggling to find a roof over the heads, it is more important than ever to give town halls more powers over housing.
“This would also provide a huge boost to the economy, generating jobs and bolstering the struggling construction industry.
“But while councils need to be given financial independence, they must not be made to inherit unreasonable levels of additional debt that could cripple their efforts to get Britain building again.”
The proposals were included in the government’s coalition agreement published in May.
However, plans to scrap the HRA were first put forward by former Labour housing minister John Healey in March.
He said the move would release at least 10% additional funding for local authorities that manage their own homes, increasing capacity to build more than 10,000 council homes a year.