Housing developers in the UK could gain hundreds of millions of pounds in windfall profits under a new policy that lets them reduce contributions to building affordable housing or even avoid paying altogether, a council has claimed.

Since December, the government has exempted anyone who turns an empty building into private housing from paying for further affordable units, even if they could do so and still make healthy profits.

Among the first super-rich investors to have benefited from the change are the redevelopers of a luxury Mayfair apartment block in central London bought in 2013 by Abu Dhabi’s investment fund. Planners fear Qatar’s ruling family could be next to gain if their agents seek a multimillion-pound cut in the affordable housing bill on a £3bn redevelopment of Chelsea barracks.

Shadow housing minister Emma Reynolds. Photograph: Yui Mok/PA

A senior official at Westminster city council, a Conservative-led borough, has described the government’s new vacant building credit as insane and estimated it could lose as much as £1bn in housing payments, deepening the accommodation crisis afflicting the poorest people.

Thousands protest in London against lack of affordable housing Guardian

Many other councils also face losing large amounts of affordable housing, officials said. The independent directly elected mayor of Bristol, George Ferguson, said the policy will make it even harder to build enough cheap housing in cities outside London such as his own, where property prices have risen rapidly.

James Murray, executive member for housing at the London borough of Islington, said: “The real impact of this is to increase landowners’ and developers’ profits at the expense of the affordable housing we desperately need.” He said he would resist the policy.

The alarm over the rule change was sounded by John Walker, director of planning at Westminster, who described it as “a government gift [to developers]”. He told the Guardian it has “sent shockwaves across all the boroughs”.

“There will be some sites where we get absolutely nothing,” he said. “On a forthcoming scheme we agreed that £9.1m was viable and we would lose all of that as a result of the vacant building credit. On just three schemes we consented [in a planning meeting] on 13 January we lost £29m. It is insane.”

The windfall for developers is affecting cities such as Bristol, above, as well as London. Photograph: Mark Bolton/Getty Images

Last month the developers of an apartment scheme backed by the Abu Dhabi Investment Council used the system to cut their contribution to affordable housing in the borough by £9m, even though Westminster said the developers had already agreed their project would be profitable if they donated £17.9m. The scheme at 20 Grosvenor Square features palatial 5,000 sq ft apartments, with cinemas and billiard rooms, that are five times larger than the average new British home.

Brandon Lewis, the Conservative housing minister, claims the policy removes “a stealth tax” that hindered regeneration and encouraged empty properties. Emma Reynolds, the Labour shadow housing spokesman, said the government’s behaviour was shameful.

Gushing money over property developers doesn’t increase the rate of housebuilding, it simply increases the price of land Alex Hilton, Generation Rent

“This is yet another example of the government giving developers an opt-out from providing affordable housing,” Reynolds said. “This government has consistently and repeatedly watered down affordable housing requirements, depriving local communities of badly needed affordable homes.”

The exemption does not require any minimum length of time that a property should be empty, sparking fears it could increase the number of empty buildings as owners flush out tenants before applying for permission to redevelop in order to benefit from the credit. Other planning experts have said that in towns and cities where property values have not grown as fast as London, it could help bring redundant buildings back into use as much-needed homes.

Alex Hilton, director of the pressure group Generation Rent, said the policy showed the government “ripping away at the number one funder of affordable housing in this country”.

“Gushing money over property developers doesn’t increase the rate of housebuilding, it simply increases the price of land,” he said. “Exempting them from paying for affordable housing is a heavy blow to the number of new genuinely affordable homes.”

Westminster is worried other developers, including Qatari Diar, the Qatar-owned developer that had agreed to build 123 affordable homes and make a £78m contribution as part of its deal to redevelop Chelsea barracks, could now reapply and seek to reduce its affordable housing obligation.

The Department for Communities and Local Government introduced the exemption in December when it also allowed anyone building fewer than 10 homes to avoid making a contribution to affordable housing. The idea is to increase the supply of housing.

“It was crazy to be levying a tax on empty and redundant buildings being brought into productive use,” Lewis said in a statement. “Such stealth taxes hindered regeneration and encouraged more empty properties. Our changes will help deliver more housing at no cost to the taxpayer in both London and across England. This is part of a package of measures by the government to reduce the number of empty buildings across the country, which is good for both the environment and for society.”

Great Marlborough Estates is planning 80 homes near Regent’s Park and is expected to pay £18.7m in affordable housing contribution. Westminster said the council now expects to lose more than £10m of that.

“This is a new policy and we are seeking clarification of what it means,” said Dean Clifford, a director at Great Marlborough. He said the level of affordable housing is already negotiated on the basis of how it affects the economic viability of the scheme.