I am no mechanic, but it sounds expensive, or, more likely, troublesome to resolve (isn't it always!).
There are second hand engines going on ebay at the moment for around the £80 mark. Cheap, but unless you are a whizz, I suspect this is going to be out of the question. I know I wouldn't fancy attempting an engine transplant.
My brother had some head/head gasket trouble with his old BMW 316i. He got a head skim & new gasket fitted for only £80 from his local specialist (not dealer). What I am beating around the bush with is, it might not cost very much at all for a garage to take the head off and have an exploritory look. I don't know, but worth a few phone calls? Mind you, the 400 series seem to now be worth about £500 in spanking condition. I always have this dilema when contemplating any work on them because it is more than the car is worth. Even with things like tyres, service, fuel...
Hope you find out cheaply what it is so you can decide what course of action to take. Good luck.