That's pretty much not going to happen.
It's a bit of an either/or situation. You either get a 4x4 with "proper" clearance (truggy, MT etc), which are impossible to convert to rally/street cars as such (you can throw road wheels on it, but it's still going to be a truggy/MT, just with worse wheels) - or you have a road car/rally rig, where you'll struggle to find the one inch clearance.
With that in mind, i'd suggest a slightly different route.
Instead of spending £500 on a kit to then upgrade, get something cheap. You can still build it yourself, you can do a few small upgrades, but in the end, whatever cheap rig you gonna buy now is going to be a dead end eventually.
At 7 years old, my first vote would go to a Lunch Box.
https://www.modelsport.co.uk/product/tamiya-lunch-box-23143
Reason being, this is cheap as chips, it's a simple builders kit, it's 4x4 and faster than a crawler (it's not monstrous though, being brushed), it comes with motor and ESC already, you just need to grab a cheap radio, servo and battery (nimh are a good fit, so you don't need to faff with LiPos and their safety straight away either), spares are cheap, teach how to paint etc.
If you ask for a used radio here in the wanted section, you'll probably get away with a total of less than £180 (kit, radio, batteries, charger). Put the rest of the money away, once he's "ready", get him something reasonable. Because, as bad as it sounds, £500 seems like a lot, but for a builders kit (with everything else, radio etc) - it's actually very little. Charger, batteries and radio from new are already £100 (closer to £150, really) at least, and kits generally don't include motors/esc/receiver/servos.
The other option i'd suggest looking into would be this.
https://www.modelsport.co.uk/product/traxxas-slash-hd-bl-2s-1-10-electric-2wd-kit-short-course-truck-1363989
This is complete, all you need is a battery and charger - and Slashs have a huge aftermarket, you could potentially turn this into something else, though technically it is somewhat of a road car and rally car in one anyway, being a short course truck. Downside, it's 2WD. You could check if there's a way to convert a 2WD slash into a 4WD slash (they do sell 4WD slashs, just not as kit as far as i am aware), and tackle that with your son.
Just me two cents - there's no "perfect" suggestion based on your criteria, you'll have to compromise on one thing or another.