Dwarves AKA worms of the earth, corpse-skins
Coming to Britain along with the Anglo-Saxon raiders, all dwarves are northern European (the first fool who tries a Scottish accent, I swear). Born from the blood of Ymir the giant, they live deep in the earth and spend their time mining and crafting, learning the secrets of stone and metal. Most dwarves never leave their caves, because the light of the sun turns their bodies to stone.
Once in a while, a dwarf will turn his back on his home forever, giving up his inborn talents in exchange for walking in the sunlight. From this point on they cannot build anything from scratch out of stone or metal ever again. They just can't wrap their minds around it. They could repair a suit of armour or sharpen a sword, but a free dwarf cannot make so much as a flint knife on his own. They can never return home (they have nothing that dwarven society wants), so they wander.
The Anglo-Saxons love dwarven mercenaries as they're tough and still retain their experience from living underground (just enough for that infravision and bonus to detect secret doors). Most of them join up with a raiding party for a while and then move on to something else. The invaders are too superstitious to impose "military discipline" on the spawn of a giant, happy for the dwarves' help when they choose to give it. Some dwarves have settled in Britain, seeking only quiet lives far from the company of others, but most don't stay in one place for very long.
They are milk-pale and sickly with deep purple smears under their eyes and their blue veins visible from living underground. Even a seasoned free dwarf campaigning under the sun for years still looks more like a corpse (if they lie very still and hold their breath, they can play dead to most beings that aren't already familiar with them). They are only slightly shorter than humans (averaging about 5'), but walk with a hunch even outdoors, as if they are still in the tunnels dug by their ancient fathers. Their eyes are dark brown, almost black, with monochrome hair ranging from jet black through gray all the way to bone-white. Their bones are dense with minerals so dwarves are actually quite heavy, weighing 300+ lbs most of the time. For this reason and a natural superstition, they don't like to ride horses.
Elves AKA faeries, the sheeda, dwellers of the hills, the ill folk
As I also mentioned, Elves live in the sad realm of Annwn, ruled over by the lord of the dead. They live eternally in a land where nothing ever changes (they cannot die except by violence or misadventure). Most never leave this grey otherworld, but a few decide that the adventuring life is for them and depart by unknown means to wander among the short-lived races. Elven adventurers still at home though, and will return between game sessions. They just walk around a tree or over a hill and they're gone. Yes, this is the same Annwn that contains all the dungeons. It's a big underworld, and where the elves live isn't anywhere near any dungeon, don't worry about it.
Elves from Annwn don't look like Orlando Bloom: they are bizarre and otherworldly personifications of magic. I'll be using the tiefling appearance tables from the old Planeswalker's Handbook (I never get tired of that book), unless the player can give me his own cool description of his elf character by the time it's rolled up. They are closer to spirits than to biological creatures like humans and dwarves, and when they get cut, it likely isn't even blood that comes from the wound.
Elves can't learn spells from books, don't need a spellbook, and don't spend time memorizing spells. Instead, they can cast any spell they know spontaneously, up to the usual limit of spells per day determined by level. More magic in their elven blood will make itself available when they gain levels, or under some other circumstances. I'll roll randomly on my spell list and see what new spells the elf PC will gain. This makes elves difficult, because what are the chances you will get something sweet like Sleep, and not some weak shit like Floating Disc? On the other hand, there will be some really cool elf-only spells.
This means elves can't teach spells to each other, except through ritual cannibalism. If an elf eats another elf's remains: add the experience levels of both elves together, that's the % chance that the eater can learn one of the eatee's spells, randomly determined. Some elves just dissolve into a puddle or a cloud of butterflies when they die, so if the whole corpse isn't available, adjust the chance of learning a spell downwards accordingly. Some elves carry straws around for just this purpose, and view this practise as "keeping the knowledge in the family." They will view as rude anybody who expresses disgust or tries to interrupt them.
Less Tolkien, more alien. Look at all the stories of making ill-advised bargains with the fae (fairy tales, Neil Gaiman, Johnathan Strange and Mr. Norrell, Tamlin) for the kind of elves I'm thinking of.
And for god's sake just go to Middenmurk and roll a few times on this and this to save us both the trouble.
Before you enact your special plan.