The overflow tank can be lower. I've had them up to a foot below the cap and never had any issues with the system drawing water back into the block on cool-down. You could probably go lower, but I never did. On my overflow tank, I brought the hose from the cap into the bottom of the tank, and then the fitting at the top of the tank was hosed to the back of the car for dumping. That way the first thing that will be pushed out of the block will be air, it will bubble up to the top and out, and when the engine draws the water back from the bottom of the tank, it is all coolant.
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