The government said the move followed engagement with victims’ families and experts as part of its plan to “put fairness back of the heart of the welfare system”.
McFadden said: “We said we’d act to tackle this gross unfairness and we’re delivering on that promise.
“For too long these violent criminals have had their living costs paid by the taxpayer twice over, while their victims and families paid the price.
“That ends today, because victims and taxpayers deserve a system that is fair and supports only those who genuinely need it.”
Secretary of State for Housing, Communities and Local Government Angela Rayner paid tribute to the families who had campaigned on the matter.
She added: “I’m aware the secretary of state has met with the families regarding this and was quite frankly astonished that the situation was as it was, and that these people were receiving benefits.
“That’s why the secretary of state has taken this action and I welcome it.”
She added the reallocation of funds was “something for the chancellor and secretary of state”.
Shadow work and pensions secretary Helen Whately said: “Killers and rapists should not pocket benefits from a hospital bed.
“Labour has taken all year to stop a loophole it promised to close. And tens of millions saved barely makes a dent in the benefits bill Labour has let spiral out of control.
“The Conservatives would make universal credit a conditional, time-limited benefit, so taxpayers’ money goes only to those who genuinely need it.”
The proposed regulations apply to individuals subject to a Section 37 order under the Mental Health Act 1983, and a Section 57A order under the Criminal Procedure (Scotland) Act 1995.
The offences covered include manslaughter, attempted murder, wounding with intent to cause grievous bodily harm, rape, assault by penetration and rape of a child under 13.
Murder is not included, because a hospital order is not an available sentence for the offence.
The change in regulation is expected to affect about 2,500 offenders already in hospital and approximately 200 a year in future, the government said, with the full financial impact of the move due to be published as part of the 2026 Budget on 28 October.
