Hi Finals19,
The appropriate reference document is CAP 413, as you correctly say, the phrase "report lining up" would be used to an aircraft requiring (not requesting, subtle difference I know) a backtrack. Were you at a holding point not at the runway threshold, where the FISO may have assumed (incorrectly) that you would require a backtrack? If not, then it's probably just a case of the wrong phraseology for the circumstances being used.
CAP 413 Radiotelephony Manual Chapter 4 Page 20
Aircraft requiring a backtrack:
(Aircraft callsign) report entering the runway.
(Aircraft callsign) report lining up.**
(Aircraft callsign) traffic is (traffic information) report entering the runway and lining up.**
**Note: Pilots will notify the FISO of their intentions.
So, once you find yourself in that situation, where the "wrong" phrase has been used - what do you do? I think you did pretty much the right thing. Being told to "report lining up" by a FISO is not an invitation or instruction to do so immediately. You have to assess whether you have time to depart safely without getting in the way of the next approaching aircraft, then advise the FISO of your intentions; entering or holding.
You are correct in saying that the normal phraseology to an aircraft at the holding point of the active runway, when the FISO expects the aircraft to just enter, line-up and depart
My understanding is that the normal instruction once holding short is either "hold position" or "take off at your discretion, wind blah blah blah"...
is one of the following;
(Aircraft callsign) hold position.
(Aircraft callsign) take off at your discretion, surface wind (number) degrees (number) knots.
(Aircraft callsign) traffic is (traffic information) take off at your discretion, surface wind (number) degrees (number) knots.