This is a subject close to my heart! First of all, is this your Peugeot 406 we're talking about? (And a rear-facing child seat)? When cars are type approved, there's a "gaberit" (a sort of representation of a "worst case" child seat), that the manufacturer needs to be able to accommodate. It could be that the 406 pre-dates that requirement though.
Secondly, is the belt too short, even with the seat fully back and fully down? That would be unusual! We managed OK with the front seat in Mrs. Avocet's old 405 and her Xantia - the latter being pretty much the same animal as the 406, in that respect, I think? You need to really shove the child seat into the seat foam, and get the belt as tight as possible. I used to kneel on the child seat when fitting it. On my old Alfa 164, which had electric seats, I used to put the seat fully back and down, then when the child seat was in, move it up a bit to take out the last of the slack, so that the belt was good and tight round it.
No, seat belt extenders aren't "legal". The legal requirement is in the Construction & Use regs and requires the belt to comply with either an old British standard, or ECE Reg 16 or EU Directive 76/114. A belt assembly with an extender in it, won't comply with any of those, because a belt with n extender, just wouldn't meet those requirements. That doesn't mean it is necessarily unsafe, but yes, technically illegal. The chances of prosecution, are, of course, minimal.
Does your 406 have seat belt reminders? If so, the switch for those, is usually built into the buckle, so if you remove the old buckle, that might become a problem. Also, does it have seat belt pre-tensioners? (They usually do if the seating position has an airbag). If so, that's often part of the buckle assembly too, so for those reasons, it's not a great idea to take off the original buckle.
Another problem, is that some tongues "feel" like they clip into some buckles, but might pull out early in a crash. Amazingly, there's no requirement for one manufacturer's tongue not to fit into another manufacturer's buckle. Many don't, of course, but of the ones that do "click", it's not always guaranteed that they will be fully engaged.
The other problem, (when not using the child seat), is that the extended buckle then comes "round the corner" of the person wearing it. Ideally, you want there to ONLY be webbing in contact with the wearer. Any hard parts, can cause injuries to the wearer. Rally harnesses, with the big buckle in the centre of the abdomen, usually have a big, padded piece between the wearer and the hard parts of the buckle.