Looking for advice on budget machine for watchmaking

[JAZZCNC]

One question on the closed loop system, is that something that can basically be added to any mill or are custom controllers / sensors required?

Depends on the closed loop system, if your talking servo system then you'll need a controller that supports closed loop. Common DIY controller is MACH3 and that won't do closed loop.
If your talking about the Lead shine closed loop Hybrid stepper system then yes this will add to any machine has the drive takes care of the closing the loop so can work with any controller.

And for Jazzcnc, I've read a few comparisons (and still don't have an answer!), but is the watercooled spindle significantly better than the air cooled to warrant the additional complexity of a plumbed system?

It's mainly to do with Duty cycle, meaning how long it can run without rest. WC spindles are 100% duty cycle and can run for days none stop, i've run mine 34+ hrs without stopping. This can be important if your doing large or very detailed 3D work that have tiny depth of cut or tiny step over, often both if high quality finish is required.
They are also much quieter than air cooled has they don't have a noisy fan to do the cooling.

The last CNC machine I had experience of was a Datron M8, and I see they do have an 'inline' mini-mill which looks great, but presumably as a 'POA' product, this isn't one for a hobbyist?!

Ah ah ye bit out the DIY range we thinks.!! . . . . If you have used or experience on a Datron M8 then your going to be sick with the offerings £1500 will get you that's for sure.!!