Labour peers have inflicted a significant defeat on David Cameron’s flagship plan to build 200,000 starter homes amid concern over how high-earners could profit from the scheme.

Peers from Labour and the Lib Dems, as well as crossbenchers, rejected two key measures by voting to impose restrictions on the discount available to homeowners under the scheme and handing local authorities the power to decide how many starter homes to be built.

The votes came as part of the Government’s housing bill, which has ignited controversy over plans for £450,000 “starter homes”, rather than using the traditional affordable homes.

Peers voted to require homeowners to repay part of the 20 per cent discount they received if they sell the property within 20 years. The rate of repayment depends on a sliding scale.

The second defeat for the Government would allow English councils to decide the number of homes required for its local area, rather than following targets set in Whitehall.

John Healey MP, Labour’s shadow Secretary of State for Housing and Planning, said the Tories were “losing the argument” on the bill.

“Peers from across the House of Lords have told the Government that they must think again on their housing plans which will sound the death knell for new genuinely affordable homes, and is set to be a big let-down for those who want to own a home.

“It is welcome that Ministers have conceded ground on Labour-backed plans to protect affordable homes in rural areas. Ministers must now urgently listen to the wider concerns with the Housing and Planning Bill, including on their own side, and come back with changes to improve this Bill.”