The "habitual residence" test, introduced by the last Tory government, will no longer be applied, in response to the ruling that it was incompatible with the principle of freedom of movement in the European Union.
Under the test, any British subject who spent more than a year abroad was ineligible for social security benefits even if they had built up contributions over many years.
It was brought in by Peter Lilley, a former social security secretary, in an attempt to end so-called "benefit tourism" whereby European nationals would allegedly flock to the UK to take up welfare payments. However, the test caught out many British nationals, particularly black and Asian families, returning from temporary residence abroad.
The phasing out of the test follows the successful challenge in the European Court of Justice by Robin Swadding, one of the estimated 100,000 people left destitute by the changes. Mr Swadding was considered to be ineligible for benefits after working for 15 years in France.
The Department of Social Security has decided that the ruling, made in February, leaves no option but to issue new advice to benefit offices.
An estimated 75 per cent of cases will now be waved through unhindered.
The Government has not formally publicised the new advice, but it has calculated that the change will cost about pounds 10m a year. DSS benefits officers have been told that from the date of the ruling any claimant who "returns to resume previous residence" is automatically deemed habitually resident.