Francesca Walker receives more than £90,000 a year in housing allowance to meet the rent on the five-bedroom villa, plus other payouts of £15,000.
A defiant Miss Walker, 34, insists that she and her children aged from six to 16 are completely justified in living there as the council could not find them a big enough home.
And, bizarrely, she claims that 'living in this house is holding me back'.
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Francesca Walker with Mohammed, daughter Rashida and son Moustapha in her £2.6million mansion
Miss Walker, whose near neighbours include David Cameron, Elle Macpherson and Hugh Grant, said: 'I've started my own business making organic soaps and bath products but any money I make I have to pay straight back to the council so there's no incentive for me to work hard to grow my business.
'Lovely though the house is, I'd prefer to live in a cheaper one. But I had to move from my old flat as gangs kicked my door down and harassed my children.'
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The four-storey villa in Notting Hill, West London, which costs taxpayers £7,600 a month, has five bedrooms, three bathrooms, a double living room, study and roof terrace.
'This house is lovely and spacious, and with three bathrooms we don't have to queue in the mornings,' added Miss Walker.
'If it seems like I've landed on my feet, I have. But I can't afford to buy a house myself and I can't work because I have eight children to look after.
'Where would people rather my family was - out on the street?'
The imposing Kensington house where Miss Walker and her family live
Miss Walker was given the house last September on a three-year lease because a rule introduced in April 2008 forces local authorities to place tenants in private properties if suitable council homes are unavailable.
This was intended to promote fairness but has caused, in some cases, huge cost to the taxpayer.
Last month, it was revealed that a Somali family of nine are living in a £1.8million central London house costing £1,600 a week.
And a family of eight Afghan immigrants have been housed for the last 14 months in a £ 1.2million house in Ealing, West London, at a cost so far of £168,000.
While then Work and Pensions Secretary James Purnell said he would crack down on the failing system last year, little seems to have been done although a Government source said yesterday that a crackdown on high rates of housing allowance would be announced this week.
Miss Walker said: 'It's great living here, obviously, but it's ridiculous that the Government have housed me here as it's a complete waste of money.
'The benefits system in this country is a joke'
'There are a lot of people who defraud the system and abuse it - it's not difficult to take advantage of it.'
Miss Walker, a Muslim convert, was brought up by her Jamaican-born mother after they were abandoned by her father, a musician.
She was taken into care at 14 when her mother had a nervous breakdown.
She said: 'I lived in three foster homes and moved school five times. By 17, I was living in a children's home with some disreputable characters.
'I was afraid of being abused and becoming a junkie. I began to explore Islam.'
She converted to the religion and had five children with her first husband before divorcing five years later.
She had three more children from a second marriage, which also lasted five years.
Miss Walker insisted: 'I'm the product of a failed society. My family failed me, the council failed me and I failed myself. I should not have married and got pregnant at 17.
'On the other hand, I've never been in trouble with the law, my kids are healthy and well-looked-after, we're moderate Muslims, not extremists, and I'm taking a psychology degree with the Open University so I can be a support worker for families who are socially excluded.'
The property owner Mr Armstrong, who lived there with his wife and three children before moving to a nearby borough, declined to comment.
Kensington and Chelsea Council originally said it had to house Miss Walker in the borough as her children were all at local schools, but now she has removed them all for home education.
Despite this the council claims there is still nothing it can do and it is just 'following Government rules'.
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