Couple of thoughts re engine... overheated heads are scrap because they are alloy - steel ones might be skimmable. But isn't the block also alloy? If that's the case, why isn't the block scrap? Only the liners are steel I believe.
Assuming I'm wrong... If a scrap yard head is straight (easily tested), and not straight because its been skimmed, would it not be safe to use it? Could they still be straight but also to soft to give a 'decent' life.
Sounds like the OP is more than familiar with K Series, but if its been overheated badly, but the block is salvageable, should the liners be resealed even if they look OK "just to be safe".
Couple of thoughts re cheepo Freelander... you're obviously more than familiar with the Rovers and MGs, but when you talk about the 'diff' in the Freelander, which one do you mean? Are you talking the rear diff (which is what #B34R is referring to) or the front diff which encompassed together with the drive for the prop shaft into what is know as the IRD? In Freelander terms (unlike other Landies) the 'diff' is at the back and the 'IRD' is at the front of the car. Before anyone on here can really give any reliable advice on this, we need to know explicitly that you mean the rear diff. Also, you need to confirm exactly what's wrong with it - and even confirm that it is what you think, or were told, is wrong, because many many people have assumed or come to a diagnosis that its one, when in actual fact its the other or something completely different - including Land Rover mechanics with years of experience, but not on Freelander.
Assuming its still got its props on, my advice would be to spend 30 minutes and take them off - literally unbolt the rear from the diff, front from the IRD, the 4 bolts holding the VCU in the middle and take it away (all bits are heavy so be careful!). See if it drives any differently - you can make some more judgements on it then. Having heard the words of caution about the state of engines from breakers yards - I'd say you're more likely to buy a worthless heap of junk buying diffs and IRDs from breakers yards. It really depends on whether you want to retain 4WD or go 2WD. Regardless of what's broke you could probably get it road worthy as 2WD for about £5 plus some oil.