I can see potential for a 3-bed by turning the downstairs reception room into a bedroom but I don’t think you’d fit a third bedroom upstairs. You could consider turning the downstairs shower room, or part of it, into a utility / laundry space. Changing to 2 separate flats could be problematic in terms of access to the first floor one - presume you’d need a shared entrance which would make accessing the ground floor front reception room more difficult. Also, I don’t know if you’d need any special permissions, plus extra fire / safety regs to turn a house into 2 flats. It seems to be potentially a lot more hassle to take that option.

I'm stumped. Can't see how to do it well. So offering an alternative, though you probably already have this as a back up plan. How about dividing a room with furniture and curtains? Ikea do a sound absorbing curtain (mixed reviews) and googling "bunk bed room divider" finds some interesting images, also shows there are lots of people trying to give children their own space in a shared bedroom.

Thanks, yes this is the main and only bathroom. We are putting in a downstairs toilet but no space for shower as well so will just be a cloakroom. Whilst it is possible to move to the front bedroom the costs associated to it make it not something we would do. All water and waste facilities are at the rear where the bathroom is located now hence our dilemma

@katlucy it's a good point - a window/door in the bedroom rear wall could be nice. yes - the door at the bottom of the stairs is a cellar. There is garden access from the kitchen only and a side gate. I suppose my greatest priority is creating a more cohesive living space, hence the thought to create a living/dining room and then make the bathroom a bit bigger with its own entrance off the newly extended hallway