We moved house when the boys were 3 and 5, which was a good excuse to expel them from the living room, and make that an adult space Though the TV is in there, so they are allowed in occasionally!
When the kids were small we had a huge open plan living room/diner, with patio doors onto the garden. And that worked well to have everything in one space as it were. But now they are older it is great to have more rooms.
They have:
A small bedroom with bunks, wardrobe, chest of drawers and nothing else - no toys.
Dining room (not smart!) with tiled floor, with open access to pens, paper, paint and craft materials - but downstairs so generally lightly supervised! (They are now 5 and 7, but are still not allowed pens or anything like that upstairs.)
Playroom upstairs - huge room with all their toys in, and a spare double bed in the corner for guests.
The boys generally spend their time in the playroom or in the dining room.
One thing I've found great has been a cheap hanging rail to put dressing up clothes on. As a result of being on easy access they have been played with much more, I think.
I do insist it is kept tidy; as otherwise I soon resent them having the biggest room in the house! They are only allowed to play with one thing at a time; but the benefit of the playroom is that they don't have to tidy away a trainset layout or whatever it is they've constructed at the end of each day. They are pretty good at keeping it tidy.
Make sure you think through your storage carefully. We basically shelved a wall with cheap racking shelving, and everything goes on that with easy open access.
We are lucky that it is a very big room; but do make sure you maximise the floor space - don't put too much furniture in; they don't need it. What they probably want is plenty of space to build a fantastic trainset layout, or scalextric, or zoo, or farm, or whatever it is.
sorry - I've gone on a bit.