The only offense would be if the FI was paid whilst holding a PPL. If he is not paid then there is no issue. The flight is aerial work because the candidate pays for the hire/training, the FI can conduct aerial work in the form of flight training, the school can charge whatever they like so I really can't see what there is to get excited about. If the FI is qualified the training is legal! You can train legally in a stolen aircraft provided it is airworthy!
That then poses the question why are Microlight Instructors and Helicopter Instructors allowed to be paid when holding a PPL? If you were taken to court for being remunerated whilst exercising the privileges of a PPL you could use all these examples as unfair regulation, resulting in some very muddy water.