Permitted development finance for residential and commercial conversions

Yes, but usually at the reduced rate of 5% rather than 20%. HMRC treats turning a non-residential building, such as an office block, shop or barn, into one or more homes as a qualifying conversion, so a VAT registered builder can charge 5% on the conversion work and on the building materials it supplies as part of that work. The relief depends on the finished building containing dwellings that meet HMRC's conditions, so the contractor will want evidence of the planning route and the final layout before invoicing at the lower rate. Professional fees, such as architects, surveyors and project managers, stay at the standard rate, as do materials the developer buys direct. Lenders cost a scheme at the rate that will actually be charged, because a contractor who bills 20% in error inflates the budget the facility has to cover.

Can a developer reclaim VAT on a commercial to residential conversion?

Often, where the developer sells the new homes or grants long leases on them. The first sale of a dwelling created from a non-residential building, or the first grant of a lease of more than 21 years in England, Wales and Northern Ireland, can be zero rated by the person converting it, provided the building has not been used as a home in the previous ten years. Zero rated sales are taxable supplies, so a VAT registered developer can normally recover the VAT paid on the works, fees and materials. A developer who keeps the flats and lets them on ordinary tenancies is making exempt supplies instead, and generally cannot recover that VAT. The two routes produce very different cash flows, so the VAT timing forms part of the facility request we put to lenders.

• Conversion work. Usually 5% where a non-residential building becomes homes.
• Professional fees. Charged at the standard rate.
• First sale or long lease. Can be zero rated by the person converting.
• Letting the flats. Exempt, so VAT on the build is not normally recoverable.

HMRC sets out the conditions in VAT Notice 708 on buildings and construction. Our guides to VAT loans and bridging loans cover a VAT bill and a purchase ahead of the works. For figures on a scheme, Instant Quotes compares development lenders on our panel.

No, not since March 2024. Before then, a building in England had to have been vacant for at least three continuous months before a Class MA prior approval application could be made. The government removed that requirement, together with the limit on how much floorspace could change use, in an amendment to the permitted development order. The building still needs to have been in lawful Class E use, such as an office, shop or clinic, for at least two years before the application, and the council still decides prior approval on matters including flooding, noise, natural light and the effect on the area. A buyer can therefore keep tenants trading while the application is decided, which lenders look at alongside how and when those leases will end before works begin.

Is there a size limit on a Class MA conversion?

There is no longer a floorspace cap in England. The 1,500 square metre limit on the floorspace changing use was removed in March 2024, so larger office blocks can now take the permitted route. Other limits remain. Every new home must meet the nationally described space standard, the council assesses natural light to the habitable rooms, the right does not apply to listed buildings, and some councils have withdrawn it in parts of their area with an Article 4 direction. A bigger building also brings bigger fire safety and building regulations costs, so a large Class MA scheme is normally funded through development finance rather than a short bridge.

• Previous use. At least two years of lawful Class E use before applying.
• Vacancy. No longer required since March 2024.
• Floorspace. No cap since March 2024.
• Space standard. Every new home must meet it.

The explanatory memorandum to the 2024 permitted development amendment order explains both changes. Our page on property development finance covers larger schemes, and development exit finance covers the period after the works. Instant Quotes lists bridging lenders that could fund the purchase.

Permitted development rights let certain changes go ahead without a planning application, often subject to the council's prior approval on specific matters. Each right has its own conditions, and they are narrower than many buyers assume:

• Commercial, business and service uses to homes (Class MA). Offices, shops and other buildings in Class E can become flats or houses, provided the building's previous use meets the conditions and the council gives prior approval on matters including flood risk, noise from neighbouring businesses and natural light to every habitable room. The Class MA conditions in the permitted development order list them in full. This is the route behind most office-to-residential schemes.
• Agricultural buildings to homes (Class Q). A barn or other farm building can become one or more dwellings, within limits on the number of homes and floor space, with building works reasonably necessary for the conversion. Changes in 2024 widened the right, but a structure that could only be made habitable by what amounts to a rebuild still falls outside it, so a structural engineer's report is usually the first document a lender asks for.
• Agricultural buildings to flexible commercial use (Class R). A building used for agriculture can change to uses such as storage, light industrial, offices, shops or a hotel, within floor space limits and subject to prior approval for larger buildings. The Class R wording in the permitted development order sets the conditions. Class R covers the change of use, not building operations, so new openings, cladding or extensions may still need planning permission.
• Moves within Class E. Since 2020, shops, cafés, offices, clinics, gyms and nurseries share one use class in England, so switching between them is not development at all, unless a condition on the original permission restricts it.
• Extensions to industrial, warehouse and Class E buildings. Part 7 of the order allows limited extensions and alterations to existing commercial premises, which can add space without a full application.

Rights can be removed by an Article 4 direction, by conditions on an earlier planning permission, or where the building is listed or in a protected area. The GOV.UK planning guidance on when permission is required explains how these rules fit together. Many residential conversions, such as a mill or chapel turned into apartments, never had a permitted route and go through full planning instead; the same funding applies once consent is granted. The Planning Portal summarises how prior approval applications work and what councils may consider.

A planning permission is a document a valuer and solicitor can read. A permitted development right is not: it depends on facts about the building, its history and the council's response. Lenders therefore ask for proof. The strongest is a lawful development certificate, issued by the council to confirm a proposed use or works are lawful. For a prior approval route, they want the council's written decision, and many are uneasy relying on approval deemed granted because the council did not respond in time.

Valuers also look at the gap between value as it stands and value once converted. A steel-framed barn in a farmyard has limited value as an agricultural building and an uncertain one as commercial space until the market has tested it, so the loan is usually sized against current value plus works released in stages, not the hoped-for end value.

On a residential conversion the valuer adds a further question: will buyers' mortgage lenders lend on the finished homes? Since 2021, homes created under permitted development in England must meet the nationally described space standard, but a lawful flat can still sell slowly if it has a poor outlook, sits above a noisy commercial use or lacks parking where buyers expect it. Valuers price that in, and some lenders limit how much they will advance against small units in a single converted block.

The main risk is assuming a permitted right applies when it does not. Buying a building on that assumption and then receiving a refusal of prior approval, or discovering an Article 4 direction, leaves you holding an asset worth less than you paid, funded by short-term money. Obtain a lawful development certificate or written advice from a planning consultant before exchange where you can. Conversion costs also overrun more often than new build, because the condition of an old structure is only fully known once work starts; a contingency and a lender willing to fund it in stages reduce that risk. If the business case depends on rent, test it with an agent before borrowing. If a project stalls part-way, continuation finance may help, though at a higher cost.