David Lammy has become deputy prime minister and Shabana Mahmood the new home secretary in a major reshuffle triggered by Angela Rayner’s resignation.

Rayner stepped down as deputy prime minister, Labour deputy leader and housing secretary on Friday, after the PM’s ethics adviser said she had breached the ministerial code when she failed to pay enough stamp duty on her flat in Hove.

In her resignation letter, Rayner said she “deeply regretted” not seeking specialist tax advice and said the strain she was putting on her family by staying in post had become “unbearable”.

Rayner’s exit is a blow for Sir Keir Starmer and comes just days after he made changes to his No 10 team.

Elected a decade ago for the Greater Manchester seat of Ashton-Under-Lyne. Rayner, a former carer and union worker, has been an influential member of her party and the government.

But she has increasingly faced questions over the past week about her purchase of an £800,000 three-bedroom flat in Hove, East Sussex, in May.

Her team initially insisted she had paid the correct amount of stamp duty but after seeking legal advice, Rayner acknowledged she had underpaid by £40,000.

She said the “mistake” came about because she believed it was the only property she owned, and she only needed to pay the standard rate of stamp duty.

Due to complex arrangements surrounding a trust for her disabled son, the Hove flat should have been considered Rayner’s second home.

After investigating, the prime minister’s ethics adviser Sir Laurie Magnus said Rayner had “acted with integrity” but decided she had breached the ministerial code by failing to seek appropriate tax advice when making the purchase.

In her resignation letter, Rayner accepted she had not met “the highest standards in relation to my recent property purchase” adding: “It was never my intention to do anything other than pay the right amount.”

Unusually Sir Keir’s reply was handwritten – a sign of the genuine personal affection he has for his colleague – saying he was “very sad” to be losing her from government, describing Rayner as “a trusted colleague and a true friend”.

Her resignation prompted the biggest reshuffle of Labour’s 14 months in power, with around half of the cabinet switching roles.

Rayner was replaced by Lammy as deputy prime minister and Steve Reed at the housing department.

Prior to Friday’s reshuffle, newly appointed Home Secretary Mahmood had been the lord chancellor and justice secretary – a role she took up after last year’s election.

Earlier this week, she introduced major legislation to Parliament to overhaul the prison system, and greenlit a decision to release thousands of prisoners early to create more space in overcrowded jails.

In another big switch, Pat McFadden moved from his role in the Cabinet Office to a new job as work and pensions secretary, which will incorporate a skills brief that has, until now, sat in the education department.

It means he takes over from Liz Kendall, whose struggle to introduce welfare reforms saw a significant backbench rebellion and a subsequent rowing back on proposed cuts. Kendall becomes the new science secretary.

Other changes include:

• Emma Reynolds becoming the new secretary for environment, food and rural affairs
• Jonathan Reynolds moving from the business department to become chief whip, making him responsible for party discipline
• Peter Kyle is the new business secretary
• Sir Alan Campbell taking on the role of leader of the House of Commons from Lucy Powell
• Darren Jones adding the chancellor of the Duchy of Lancaster to his existing role of chief secretary to the prime minister.

Ian Murray expressed his disappointment at losing his job as secretary of state for Scotland – and has being replaced by Labour veteran Douglas Alexander, who held the same job under Tony Blair.

Lisa Nandy, John Healey and Wes Streeting remain in their current roles of culture, defence and health secretary respectively.

In addition to a major reshuffle, Rayner’s departure also triggers a deputy leadership election among party members.

Details of the contest are yet to be announced, but it could create a severe political headache for the prime minister, as it has the potential to become a vehicle for MPs and members to voice their discontent at Sir Keir’s leadership.

As the reshuffle was taking place, Reform UK members were gathering in Birmingham for the party’s annual conference.

Bringing his keynote speech forward to lunchtime, to coincide with Rayner’s departure, Reform leader Nigel Farage said the government was “in crisis”.

Responding to the reshuffle, Conservative leader Kemi Badenoch said: “Phase Two of Starmer’s government didn’t even last three days.

“He was too weak to fire the deputy prime minister, even after he was told she broke the ministerial code, and now he’s shuffling deckchairs around on his sinking government.”

Liberal Democrat leader Sir Ed Davey said: “Until Keir Starmer is ready to grab the bull by the horns and confront the problems our country really faces, it makes little difference who sits where around the Cabinet table.”