I'm having some similar issues as ManhattanMarc myself.
Relocating the User folder on my system seems to be absolutely trashing anything to do with the Modern UI on my desktop when installing Windows 10 Home or Pro. When I did Enterprise on my laptop there were zero issues nor have any cropped up. On my desktop, however, I got a clean install going with the User folder relocated and functioning correctly only to have the Start button, Cortana, Windows Store, and Modern UI aspects like account creation become absolutely unusable. In addition to that every second or so the little round/circling "something is active" indicator on the mouse cursor would blink off, and Event Viewer would track multiple error messages pertaining to Cortana, uishell.exe (IIRC), and one or two other programs/services.
I tried pretty much everything from the troubleshooting sites on the matter; sfc /scannow, DISM, powershell, and even a big, huge batch file where I couldn't identify 98% of the stuff in it. I checked services, I rolled back registry changes I'd made prior to Windows 10 coughing up a hairball, I shut down services and startup tasks, and I even managed to find a round-about method to create a new user account only to have the issues persist there as well. In fact the only time I saw any relief from this issue was when rebooting into Safe Mode which allowed the Start button to function properly.
After something like 12 hours of trying to fix that I decided that there was no point in not reinstalling Windows 10. That was about 16 hours ago, and most of the time spent since has been devoted to trying to get a functional installation going.
Every single time I relocate the User folder Windows' installation process goes into the "skip product key, change settings, 'Just a moment...', Reboot!" loop that ManhattanMarc described. Furthermore every time I've re-booted into OOBE with the User folder relocated off of the OS drive/partition the start menu in the default Administrator account has refused to work indicating that even on a fresh, clean installation the issue persists. Heck, I even had two separate instances of the bootup following the sysprep call resulting in error messages popping up saying that I needed to restart the installation process from scratch, and during one of the infinite loop reboots I managed to get an error message to pop up saying something about explorer.exe but not providing anything useful like error codes.
The .xml file matches what's in the OP, sans differences in drive letters, and I've even cycled between Windows Home and Pro in both installation and .xml file playing "mix and match" when proper pairings failed. Mix and match also failed. I snagged an ISO with the proper install.wim file via the steps mentioned in the OP (IIRC), and still no go. Hell, the first, and only, successful install with the User folder relocated was with an ISO that had install.esd. I've done multiple full installs both with and without network and internet access to no avail. Heck, even going through the UEFI stuff to reformat the OS drive as GPT instead of MBR to match the (4TB) drive I wanted to put the user profiles on didn't seem to help.
I'm rather getting to my wits' end at this point as I'd like to give Windows 10 a fair shot based on how it's actually letting me utilize the HD4600 GPU integrated with my i5-4690k while Windows 7 would just crash/reboot as soon as my desktop got past the BIOS stage when I had the iGPU enabled. Edit: I quite simply have severe reservations about utilizing an OS with user profiles on the same partition as the OS. I've already had one instance where Windows crashed so hard that I couldn't access the partition afterwards and lost thousands of hours of gameplay as a result. I'm not particularly eager to either risk having that happen again or having to duplicate my entire user profile on a separate drive because developers got stuck on stupid and started hiding files all over the user profile directory structure.
I seriously miss the days when game developers had a brain on the matter and saved config files, game saves, and so on in the directory you installed the game to.