OK, so I have spent quite some time typing this bug report but ultimately found 
the solution.
I leave a comment in case other people face the same issue.

After a lot of head scratching:

You have to run "sudo update-initramfs -u" to regenerate the image!

What a pity it's not in the docs! (upstream issue?)

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https://bugs.launchpad.net/bugs/1565083

Title:
  16.04 beta2, cannot override udev network interface name in VM

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