I got into a bit of a mess trying out @Gatt's GP setting for sorting out the multiple My Documents issue. Stupid idea to try a fresh user as the issue was coming from existing users.

Anyway, I've managed to set up a safe and proper test for the policy with a user migrated from XP to Win 7 client. My Documents was renamed in share from username to My Documents. I applied the GPO and nothing seems to have changed in the share however. Possibly, as @Gatt said, I need to remove the desktop.ini files and then the policy will prevent the folder being renamed each time the user logs in on Win 7.

Due to further investigation, I have also found that, in my setup at least , connecting home folder to \\servername\sharename\%username%\My Documents (in the user account profile tab) works and means that the user doesn't get the share folder renamed. It seems to work fine with user logged in to both XP and Win 7.

No doubt a lot of what I do is bad practice, due to self-teaching. Migration to Server 2012 planned, with expert installation, and hopefully this will get me a properly functional setup!