Thinking about this again, I do think the idea of moving out, renting out the current house and using that to rent somewhere else, even if it needs to be topped up a bit to make space for DSD to have a room/for there to be a spare room either DSD can use.
This will break the idea that your home is still her home. While it'll protect the inheritance/investment, it will mean that someone other than family are living in it (it's been the Aunts, then both her parents, then just her mum, then just her dad in this house).
A rented property will break the idea that it's her home that you've moved into. She may well find she doesnt need the security of her own room in a new house. She wouldn't be giving up her childhood bedroom, but deciding if she wanted to have a room reserved in a new home.
You can 'sell' this idea to your DH as it's clear the house you are currently in isn't big enough, given that a room has to be reserved for DSD - but as this isn't a long term issue - your eldest without additional needs is already 5, within 5 years she may well have left home and your DSD have settled with her own home, rather than living with one parent or another. It would be a waste of money and resources to move to a bigger bought house that you will not need within a short time, also a waste to extend/convert the loft for such a short period of time.
Renting is the best option for needing extra space for a short period of time.
If this is agreed, getting the currently property ready for rental (do not allow it to be rented to family/friends!) will help with the mental break. The loft and all cupboards will have to be emptied, packing things up for a new property or thrown/charity shopped.
I was 25 when my parents sold my childhood home. They bought a smaller property and used the difference to buy a holiday home/invest to top up pensions. There was always a guest room at the smaller house, but as I'd never lived there, I didn't feel I had ownership of it. If I needed to, I know they would have always taken me back in, I had that security, but I didn't feel it was my home in the same way as visiting them when they were still living in my old childhood home.
PIL are still in DH's old childhood home. It still has lots of his stuff in the loft/the garage. He doesn't want it, but doesn't want to deal with it. My parents moving in my 20s forced me to either remove or accept they would throw all those old clothes/toys/school art projects.
This seems the 'kindest' way to avoid taking a bedroom off her. You aren't throwing her out, she'll always have a bed at wherever your home is if she needs it, it's just that you are all moving. It's not about DSD giving up her claim on her childhood home. Plus after a year or so of renting it, it stops being everyone's 'home' and becomes your DH's 'investment property'.