Blimey - that really is trying it on!
I should start by explaining that the house was not yours to live in at that point - I expect you already have.
Then try CAB, as others have suggested, and then your MP.
The trouble is LAs are so strapped for cash that they will try anything now.
They may in fact strictly have the law on their side (and they have ready access to lawyers, whereas you might have to pay) and I am sure they have checked this out. It seems that what they are saying is that the value of your mother's house was ignored because it was your sole residence and that when that ceased to be the case, that concession would come to an end. However, they have to act reasonably, and clearly the house under probate was not available to you as a dwelling in your mother's lifetime as a place of residence.
But do be prepare to find that you are not able to dispute it as the LA probably have the law on their side, however impractical and unreasonable this might seem.
Have your chat with CAB and as much free time as you can with a lawyer, but personally, if the case looks a bit dodgy, I would not take it further for fear of incurring greater expense.
I am so sorry that you are having to deal with all this at the time of a double loss, and send my condolences.