British Citizenship invalidates Ancestry Visa or not????

I am wondering if anyone has come across this before and I invite comment to my opinion about what the HO did and what they should have done:

My wife and I came over to the UK on an Ancestry Visa and spouse AV. Half way through our 5yrs, my wife decided to excerise her right to become a British Citzen by registration (born before 1983 to a British Mother).

NB: We came over on AV just because it was quicker at the time and didn't change.

My wife sent in her Australian passport, paid the 80 pounds with a basic application and in a few weeks was granted British Citizenship.

Fast forward to two weeks before the expiration of our Ancestry Visas we make applications for ILR (clearly my wife didn't need to but she had to for my spouse Ancestry Visa so I could be granted ILR) only to be told they were invalid after my wife registered as a British Citizen and therefore they would not consider our ILR applications which meant I was no longer a resident of the UK post the expiration of the Ancestry Visa and had to leave before the expiry date to avoid being an 'overstayer'

NB: My wife's passport still had an unmarked, clean Ancestry Visa and was no indication it was then invalid / cancelled etc.

This brings me to the errors of the HO:

If one is subject to an 'immigration time restriction' (ie. Ancestry Visa), has the HO erred in granting British Citizenship by registration to my wife? - It is clear in the rules that you cannot be granted British Citizen by 'naturalisation' unless you have been free of an 'immigration time limit' for 12mths unless a discretion to exempt has been applied but it is silent about registration rules.

If the answer is deemed to be that the HO is not restricted in the same way when granting British Citizenship by registration, i.e. HO can simply issue a British Citizenship by registration over the top of an Ancestry Visa, then was it not encumbent upon the HO to notify my wife of the ramifications that lay ahead for both of us regarding the cancellation of our Ancestry Visas and what would flow from that course of action?

I have looked at the rules extensively and I cannot find any such rule that firstly empowers the HO to issue or not issue British Citizenship to someone who is the subject of an 'immigration time limit' nor have I been able to find any rule that stipulates if an Ancestry Visa holder is granted British Citizenship by registration that the Ancestry Visas become invalid.

Over to the viewers and give me your thoughts or direct me to the rules, as this will be a JR in the future.

Registration under Section 4C does not require the applicant to hold indefinite leave.

A British citizen cannot be subject to leave, neither limited nor indefinite.

Moreover, if the main Ancestry holder was not granted ILR, then the dependant apparently cannot satisfy 196E because 196D(i) fails.

An option for the dependant appears to be applying for FLR(M) under Appendix FM (another 5-year route prior to SET(M)).

The Home Office is right.

Some broad principles
a) Immigration and nationality are granted under different rules and laws. Both of them have different, disparate requirements. They do not form a continuum. Immigration need not precede nationality.

b) A British citizen cannot have leave to reside in the UK. In other terms, a British citizen is ineligible to apply for a UK visa. If British citizenship is acquired after a visa is issued, the new British citizen's Right of Abode supersedes any pre-existing leave, which ceases to exist.

Thus, ILR (and any other form of leave under the Immigration Act 1971) ceases when a person is granted British citizenship (Paragraph 46 of the judgment).

The Home Office has not erred by granting your wife British citizenship under a pathway for which she was eligible, which is provided for by nationality law. In its wisdom, the British Parliament decided that the registration path used by your wife did not require the applicant to be free of immigration restrictions.

EDIT: Overtaken by Vinny's much more succinct response.

As Vinny has mentioned, your now British wife can sponsor you as the spouse of a British citizen, meeting all the financial requirements, etc. But that will be the start of a new five year clock to ILR.

Also, I am not sure if your Ancestry visa dependent leave was automatically invalidated when your wife acquired British citizenship. In which case, you will have been an overstayer from the date of your wife's registration as a British citizen.

It is not the Home Office's job to educate you. It is yours. The information is in the public domain and ignorance of the law is no excuse.