Build first, then demolish?!

You do not have to maintain the setback areas on the same property. Setback areas would be necessary for 2 properties. Even if there are 2 properties, you can register building encumbrances and build that way. Are you only allowed to build the large house if the small one is demolished? (building law) If yes, then I would try to make a deal – build large and then demolish afterwards – whether that works out you have to try. Alternatively: modular building – deliberately small house without setbacks next to the existing house – after grandma moves out then demolition and expansion of the new building.

.. but that will be fun for grandma - living on a construction site for 1 year .. this is going to be joyful.