So in answer to your questions, here are my responses:
1) Staying in Watford Junction is a matter of choice. You might find a cheaper place there, but you won't have an extensive list of hotels or BnBs to choose from. I would check both places and see what you find and what works for you.
2) As isn31c noted, they don't have motels in the UK. With regards to bed and breakfast versus hotels, a lot depends on your budget and how much you are willing to research. I've stayed in both B&Bs and hotels and enjoyed my stays in both. If I was going to really watch my budget, I might look for Premier Inns, as they are a chain of hotels in the UK that are very consistently clean and comfortable and reasonably priced. You also might want to consider apartments, at least in some of your stays, as it will be easier for a family of four adults. There would be a kitchen there and also possibly a washer.
3) I'm going to skip this, since I would suggest, once you narrow down your itinerary, that you start looking at guidebooks. Then come back here if you have any specific questions and we will all be able to give you some advice about that.
4) London is good for arrival and departure. That said, you might consider a multi-city flight. For example, if you reworked your itinerary, you could visit the Cotswolds at the beginning of your trip, then head up to North Yorkshire and beyond, see what you want too see, and then fly home from Edinburgh. That would definitely give you an extra day of time, since otherwise coming back from Fort William to the Cotswolds will take a full day of travel time.
5) With regards to rental cars, I've used Arnold Clark on my last two trips to the UK. In 2023, I rented from them through their affiliate, Celtic Legend (14 day rental) for my trip to Scotland, and 2024 when I spent 6 weeks in England, I rented directly with AC (18 day rental). Both rental experiences went very well. Arnold Clark is a pleasure to deal with, no matter who you book with. I would check with both to see what price they give you. Celtic Legend will sometimes offer specials if you book through them, like giving you free sat nav or a second driver for free. I usually don't take advantage of the sat nav because I prefer using Google Maps on my phone, and since I'm a solo traveler, I don't really need an extra driver. But it does pay to check there
The best thing about them is that when you pick up the car, the agents explain everything to you and make sure that you understand the fine print. They are good about upgrading sometimes as well (once I was upgraded to a Mercedes at no cost, and another time I received an automatica at no extra cost (I had booked a manual). They are always very courteous and helpful, and I will continue to use them in the UK for future rentals.
Arnold Clark has offices in London (including Heathrow) and Edinburgh.