A lot depends on the outcome you're after. Do you want a tidy example in relatively standard condition, or to go all out with shiny bits? I personally prefer the former, but the latter gives a lot of scope for individuality and can work too if executed tastefully.
50mm lowering springs and stiffer anti-roll bars will improve on-road handling, but obviously at the expense of off-road capability. It would make for a capable and stable tow vehicle though.
While you certainly can put a TD5 in with enough time, effort and cash, I'd personally spend it on upgrading the 300tdi. There's lots you can do to them to improve performance if that's what you're after. Turner Engineering and others make all sorts of upgraded bits.
You can do a lot internally with these too. I carpeted the back of my 90 using ordinary low-pile carpet. End of a roll from a carpet shop was dirt cheap. Sound deadening can be fitted all over the place to help reduce the 'tin shed on a windy day' effect. Automatic gearbox out of a disco is a doable conversion which tends to have good results.
If it's anything with rear seats, I'd recommend not going down the popular route of swapping the rear seats for forward-facing ones. They really don't fit properly unless you have the later chamfered wheel boxes, meaning the seats end up too close together and you can't get in and out without folding one up. This is frankly dangerous in an accident as rear-seat passengers can't readily vacate the vehicle. Go for sideways or backwards only IMO.