Terrain Deformation System

Hello everyone.
Im working on a game based on a real-time terrain deformation system. There are 2 layers of terrain: 1. rough, with mountains and valleys; 2. plain and smooth. #2 is under #1, decals of explosions are revealing the second layer throughout the game. I was trying to implement it with the help of Unity which proved to be rather pointless -- its heights system doesnt allow my concept to work properly.
http://postimg.org/image/xmgygp4tr/ — here is a good example of what I`m looking for.

The question is: is Unreal Engine the appropriate tool for such idea?
Could you show some examples, projects or maybe tutorials where it was achieved before?
Thanks.