I love this so far. I got so into it I forgot it was an AU until Lily showed up. (I was so confused for a minute! That's a good thing, though.)
Poor Uncle Algie, though. :(
And yes, I realized later on that Neville's grandfather should have died at a later point,
It works, though! First, we don't know for sure that it was his paternal grandfather; it's a safe assumption, but it could've been Alice's father, too. Second, since it's an AU, it can be chalked up to the alternate timeline IMHO. Plus... sorry, Clarence, but it's probably easy to write this without him in the forefront.
In any case, I look forward to seeing where you end up going with this.