Día de Muertos is more rooted in central and southern Mexico, though has spread north in recent years and is celebrated - or holidays very similar to it in concept of remembering the dead are celebrated - throughout many parts of Latin America and the diaspora from there with many regional variations around the same time. It could work for South America, but they'd need to pick versions that work.
Not all kids like ghosts and ghouls (not all kids like Christmas or Easter or sweets either) and, much like with Día de Muertos, there are a lot of differences in how and why people celebrate it. For some it's more connected to Samhain traditions, for some it's a very Christian celebration with wide variations between different denominations, for some it's just modern commercial fun, for some it's not really something they do or like, and more besides.
For some kids the kind of celebration being described in school wouldn't be "normal" or "happy". There is no one variant that's "British culture" as all of these are common here and it seems contradictory to go on about this being British and normal along with it being about being multicultural. Not celebrating Halloween as you describe isn't 'narrowminded', it's just different.
It does seem a bit silly to not do Halloween costumes on the grounds of costumes and COVID and then do another costume based thing. Maybe this seems like an equally fun, safer option. Maybe they've had issues in previous years and covid is an excuse. I wouldn't really push on it, so many other things for the school to be working on than this.
Plenty of us have holidays not recognized in schools or in the wider communities we live in now so we celebrate at home. This whole "they won't be allowed to enjoy or experience anything" thing I don't get, there is plenty to enjoy and experience outside of these holidays in school and there are plenty of ways to enjoy and experiences these holidays outside of school. My local area is doing a pumpkin hunt - you put a pumpkin or pumpkin picture in your window, the kids go hunting for it, and their parents give them a treat for finding them. It'll probably have a bigger take up than trick or treat as people are really bored. I'm happy for them and will be taking part to spread some joy, even if I spend that evening as I do each year with my family and our altar with photos of our dead loved ones and discussing the dead, particularly the infants and children on the evening of the 31st.