The article "Gandhi in the Mind of America" by Rudolph Lloyd comments on the Churchill quote, "Americans have been conscious of Gandhi since about 1920, when his first non-cooperation campaign almost top- pled British rule in India. He has been revered and reviled since then. In 1921, John Haynes Holmes told his Community Church congregation in New York that Gandhi was “the greatest man in the world”, greater even than Lenin and Woodrow Wilson. “When I think of Mahatma Gandhi, I think of Jesus Christ”. In 1930, the year of Gandhi’s second great non-cooperation campaign that almost toppled the British Empire in India, Winston Churchill, the empire’s great exponent, coined the epithet “the half- naked fakir”, a phrase that spoke for Americans and Britons who identified Gandhi with what they believed was India’s self-inflicted poverty and its fraud- ulent spirituality." Published in Economic & Political Weekly by Athena Information Solutions Pvt. Ltd, Nov 20, 2010. It's a good article, I'll look for other British perspectives.

Using some of the information brought up in article titles/abstracts by /u/myplasticlove along with other information, here are the conclusions I've found with the sources to match.

The Washington Post article (August 1931 issue) titled: GANDHI IN LOIN CLOTH RACES FOR HIS TRAIN talks about Gandhi and his path to the round table conference, but none of it really seems to be anything too big a deal; they mention him defying a night ordinance to get there (driving past policemen in the process), and they mention him having faith that the full moon would increase the prospects for a favorable resolution as they say Hindus typically do. One line in particular does say that it would be difficult for anyone to expect that a man looking like that was a figure of great international power, given his attire and few teeth and shaved head.

The article titled: Gandhi, Clad in Loin Cloth, Is Received by Royalty, from the Washington Post (November 1931 issue) points out that Gandhi ignored the request for formal attire, and reports that he was the center of attention despite the displays of jewels and other expensive items on his colleagues. It also notes that he paid little attention to custom (shaking the hands of the king and queen in "friendly, but not humble" ways, and refusing the tea set out for guests).

The article titled: LOIN-CLOTH ATTIRE OF GANDHI CAUSES LONDON TO TITTER, from the September 1931 edition of the Washington Post mentions that there was "good humored laughter" over the man who "dared brave the English climate in such garb". Other than that, the article mostly focuses on his possibly going to America, but nothing more.

The Washington Post article (October 31, 1931 issue) titled: Gandhi to Visit King George In His Loin Cloth and Shawl London, talks about how he was warned that the climate might be too rough for just a shawl and loincloth, and mentions that he planned to wear "morning dress" as instructed...which to him meant exactly what he wore.

The last one suggested by /u/myplasticlove, the Washington Post article (December 1931 issue) titled: Pope and Mahatma Fail in Audience...this one basically says that the meeting between the Pope and Gandhi that was scheduled was apparently cancelled because of Gandhi's insistence on wearing his native garb, the shawl and loincloth. The Vatican publicly declared that the reason for the cancellation was other pressing engagements already made, but the Post insists that it learned it was because of his garb. The Vatican supposedly felt "too uncomfortable" suggesting he change, and didn't consider it appropriate he wear such garb to meet the Pope.

Now, this was a great place to start. On the surface, it seems like there was no issue with his garb, outside of the Pope. I did some research on other news articles to see what else could be found, and other papers, and here's what I found:

According to the New York Times (Gandhi, in Loincloth, Meets King and Queen), the King and Queen greeted him very warmly, and were happy to talk to him. When asked what they spoke about, Gandhi said it would be "most undignified" to discuss it. He did, however, say that the King and Queen were "most friendly" towards him, and that he also quite liked the Prince of Wales. It didn't appear there was any animosity, openly anyways, over his garb. It absolutely must have come as a shock, according to most sources, but not because they weren't expecting it: Gandhi had informed everyone at least 4 days in advance that he would be attending in his "morning dress" as defined above.

It is noted that in a previous meeting with the royal family, he actually did wear Western garb. However, in this case, he chose native garb as mentioned because he saw no reason not to.

It doesn't appear that anyone was surprised, or offended, openly, as I said. However, we can speculate that they probably were. As Clothing Matters: Dress and Identity in India, by Emma Tarlo (free version of this quote found here notes, Britons and educated Indians alike viewed his garb as backwards and a step back from civilization. Many thought it violated decency in Islamic law, Christian tradition, etc., but Gandhi very clearly thought it worked (and he did draw big crowds regardless). I highly suggest you read more from that source; since it's free especially, and because it gives great quotes from sources, you can find even more about what figures like Winston Churchill, Beverly Nichols (former public speaker and playwright), and even the King said. And it does appear that while there was some initial awkwardness about it at the Round Table Conference, and after regarding things like invitations to afternoon tea, but it doesn't appear to have held up anything I can see.

Hope that helps! I can cite the news articles more precisely if necessary!