If you’re converting a property, a lot of your building bill can carry VAT at 5% instead of 20%. That covers turning offices or shops into flats, splitting a house into flats, creating an HMO, and bringing a home back into use after it has sat empty for two years. On a £400,000 build contract, that’s £60,000 less VAT.
The 5% rate is set in law. But it only works if your builder charges it, and many won’t unless you show them why it applies. Here’s how it works, in plain English.
What’s on this page? ▾
Which projects qualify for 5% VAT
Building work normally carries 20% VAT. For these four types of project, the work and the materials your builder supplies can be charged at 5% instead:
- Commercial to residential. Turning a building that was never a home (offices, shops, pubs, barns, warehouses) into flats or houses.
- Changing the number of homes. Splitting a house into flats, or turning several flats back into one house. The number of homes in the building has to go up or down.
- Creating an HMO. Converting a house or flats into a house in multiple occupation.
- Empty homes. Renovating a home that has been empty for at least two years before the work starts.
The 5% covers the building work itself: walls, plumbing, electrics, plastering, and kitchens and bathrooms your builder fits as part of the job.
Some costs stay at 20% whatever the project: architects, surveyors and other professional fees, materials you buy yourself, carpets, most appliances, and hiring equipment on its own.
Proving your project qualifies
If your builder charges 5% and it turns out the project didn’t qualify, HMRC goes after the builder for the missing 15%. That’s why many builders default to 20%. Give them the evidence up front:
| Project | Evidence to give your builder |
|---|---|
| Commercial to residential | Planning permission showing the change of use, and proof of what the building was used for before |
| House into flats, or flats into a house | Planning permission or building control approval showing the number of homes before and after |
| Creating an HMO | Planning permission or HMO licence application showing the conversion |
| Empty for two years | A letter from the council’s empty property officer, council tax records, or utility bills showing no one lived there |
Agree the 5% rate in the building contract before work starts. Trying to fix invoices after the job is finished is where these projects usually go wrong.
Planning a conversion and not sure it qualifies? Book a free call before you sign the build contract.
Buying a commercial building: the form that can save you 20%
This one applies to commercial buildings only. Many commercial owners “opted to tax” their building years ago. That means VAT at 20% gets added to the price when they sell it.
If you’re buying the building to turn it into homes, you can give the seller a form called VAT1614D. It confirms you’re converting the building into dwellings, and it cancels the VAT on your purchase. On an £800,000 building, that’s £160,000 you don’t have to find.
The timing is strict. The seller must receive the form before the price is legally fixed, which in practice means before you exchange contracts. Miss that and the VAT stays.
Can you get the 5% back? It depends on the project
This is the part most investors miss.
- You can get it back in one case only: a commercial building converted into homes that you then sell. The first sale of each new home is charged at 0% VAT. That lets you register for VAT and reclaim the 5% you paid on the building work, so the VAT cost of the project can end up at nil.
- In every other case, the 5% stays a cost. That covers house-into-flats projects, HMOs and empty homes, whether you sell or rent them out. It also covers a commercial-to-residential conversion that you keep and rent out, because rent on homes has no VAT. You still save 15% of the build cost compared with paying 20%, but you can’t reclaim the 5%.
So if you’re converting a commercial building and haven’t decided whether to sell or keep the homes, work out the VAT both ways first. Selling can mean the VAT costs you nothing. Keeping means it doesn’t.
If you’re converting a building into a home to live in yourself, there’s a separate scheme, the DIY housebuilders scheme, that lets you claim VAT back.
Two worked examples
Example 1: an office turned into 6 flats, then sold. This is the same project done two ways. On the left, nobody planned the VAT. On the right, the buyer gave the seller form VAT1614D and the builder charged 5%.
| Without tax planning | With tax planning | |
|---|---|---|
| VAT on £800,000 purchase | £160,000 | £0 (VAT1614D served) |
| VAT on £600,000 build | £120,000 at 20% | £30,000 at 5% |
| VAT reclaimed when the flats are sold | £0 | £30,000 back (flats sold at 0%) |
| Total VAT the project ends up paying | up to £280,000 | £0 |
Example 2: a house split into 3 flats, kept to rent out. The build contract is £150,000. At 5% the VAT is £7,500 instead of £30,000, a saving of £22,500. Because the flats are let, the £7,500 can’t be reclaimed, but the project is still £22,500 cheaper.
Frequently asked questions
Does 5% VAT apply to a pub or barn conversion?
Yes. Any building that was genuinely not a home and is converted into homes qualifies. Pubs with an existing manager’s flat need more care, because part of the building was already lived in.
I’m turning a house into an HMO. Do I get 5% VAT?
Yes. Converting a house or flats into a house in multiple occupation qualifies for 5% on the building work. Because HMO rent has no VAT on it, you can’t reclaim that 5%, but you still save 15% of the build cost compared with paying the full 20%.
How long does a property need to be empty to get 5% VAT?
At least two years before the work starts. You’ll need evidence, such as a letter from the council’s empty property officer or council tax records.
Does splitting a house into flats qualify?
Yes, as long as the number of homes in the building changes. A house becoming three flats qualifies. Refurbishing a flat without changing the number of homes doesn’t.
My builder already charged 20%. Can I fix it?
Sometimes. The builder can issue a credit note and re-invoice at 5%, but this gets harder once the final account is agreed. Raise it straight away.
Do I need to be VAT registered to get the 5% rate?
No. The 5% rate on the building work applies whether or not you’re registered. You only need to register if you want to reclaim VAT on a commercial-to-residential project you’re selling.
One form and one contract clause can save five or six figures on a conversion. Book a free call before you exchange or sign the build contract.
Related reading: VAT implications for property developers · Title splitting explained · Buying a block of flats
