The garage will have to be removed. Otherwise, I don’t see any real solution.
I don’t want to seem disrespectful, but how old is grandma?
Let’s not have it spread that grandma is disappointed about the loss of the garage, that there have barely been any compromises since she moved in, and now grandma has to leave her house.
I would first read the development plan. Then you’ll know with which distances, floor area ratio, site coverage ratio, ridge heights, etc., you can plan.
Then you’ll know how and whether a house, as you need it, can even fit on the divided plot.