Streams and riparian zones are highly heterogeneous ecosystems. Their high biodiversity is promoted by variable flow velocities and water depths, strong hydrological gradients and disturbance regimes. However, human interventions like damming and channelization have degraded these ecosystems world‐wide. And, although restoration efforts have increased in the past decades, ecological improvement is lagging. We assessed vegetation development in channelized lowland stream valleys in the Netherlands, combining innovative restoration measures to the stream and stream valleys. This “stream valley restoration” entailed construction of narrower and shallower channels to increase flow velocities during base discharges, meandering of the watercourse to increase flow and depth heterogeneity and excavation of banks to create wide v‐shaped stream valleys. We evaluated the effects on functional aspects of the developing in‐stream and riparian vegetation by comparing restored stream reaches to nearby unrestored reaches. The reduced channel dimensions led to higher flow velocities, which, through interaction with meandering, triggered a higher variability in flow and depth. Combined with enlargement of the floodplain, this promoted flooding in stream valleys and created wider environmental gradients. Plant diversity strongly increased in the floodplain area, the land–water interface and the shallow water habitat at the channel margins, but decreased in the central parts of stream channels. There, higher flow velocities led to more typically lotic (running water) in‐stream plant communities, indicated by a sharp decrease in floating‐leaved species and an increase in trailing species. Riparian vegetation showed a higher beta‐diversity across the wider valley slopes of restored reaches, with more wetland species in areas with water‐tables between 0.0 and −0.6 m, and more upland species as well. Synthesis and applications. This study demonstrates that the combination of strongly reduced channel dimensions, remeandering and widening of riparian zones, is effective in restoring in‐stream and riparian habitat heterogeneity. The restoration efforts lead to distinct immediate increases in total and beta‐diversity of many typical stream and riparian plant species. Overall, this stresses the importance of applying restoration measures to both streams and stream valleys simultaneously, considering them as a single landscape unit.