We've done both - demolished an old house and built new, and fully renovated. Given a choice I would have demolished where we are and started again from scratch. I love our current home, but with a reno you are always having to work with what you've got which means some compromises on what you really like. From a cost point of view, there's really not that much in it, especially if your reno involves a second storey addition - although we couldn't have had the same spec level if we built, we still could have finished a new house to a very high level (we went seriously high spec level on just about everything in our renos)

So, unless I was completely in love with the house design and just wanted to say freshen up bathrooms and the kitchen I would either build somewhere new, or demolish and build if I loved the location but not the house.

Definitely second the need to make it all official too - never seems quite right with family but its a whole lot better than dealing with very unpleasant fallout if it all goes pearshaped.

Good luck - sounds exciting