Number 2) is important as to fence or cordon off the land suggests an intent to profit - where as to leave it as a garden enjoyed up to the date of sale, makes its less so - an odd rule I do agree - but none the less one that HMRC rules by!
So no temp fence,no cord no nothing - can be permitted.
If your next question - work cannot be started on the seperate plot until after the sale of the original house, no - thats not right - you stated that
"Can we sell our house first to finance the build, does this break the principle private residence thing"
So this suggestd that you would sell then build - thats all - but if you start the build before you sell the original house, then you have 12 months to move into the new property (so the build must be completed within 12 months for you to waulify for private residence relief for the whole period from start of build to sale - assuming this stays your main residence throughout)
However you then suggest that you will sell this new build as well - the time you spend there has to be of a qualatative nature (so all aspects of your life conducted from here - so DVLA, passport, bank details, doctors and dentists all with this new address) and if you then go onto move out and sell after that move out - then you have up to 18 months before capital gain would be considered on any profits made..