To my knowledge all major pub operators opt to tax their whole estate. They have a special agreement with HMRC as to how input tax is treated.
You have to try to have the option disapplied, since you are converting to residential. Legally, they cannot refuse a disapplication certificate. However, in practice, you may find they will either try to refuse to accept it, or to increase the price to compensate them for lost input tax.
I think the fact that the upstairs units were for overnight b&b would prevent them being residential use. This helps with your use of the 5% rate for conversion works, You will need to advise the contractor(s) that the work is eligible for the 5% rate.
I do think you need to engage a specialist to work through these issues with you; this will include checking of contracts, plans, etc., which cannot be done on a forum.