The fat32 solution works fine for booting in UEFI mode with the vhd on the 2nd partition. The problem now, is that BIOS mode boot ends up with a blinking cursor because it can't find the vhd on the 2nd partition. If I use Bootice to make the 2nd partition accessible, my bootmanager (BIBM) will see it and I can boot the vhd in BIOS mode. Making the 2nd partition accessible with bootice doesn't have any affect on a native boot which reverts to using the fat32 partition and only seems to support UEFI mode when using 2 partitions (Fat/ntfs) on a USB flash. A fix for the blinking cursor and still have everything work would be the icing on the cake.
BTW, using my setup above, WinNtsetup got an error trying to mount the vhd from the 2nd partition when I specify the first partition as the boot drive. I had to manually mount it as the install drive with diskpart so setup could copy the boot files and create the correct BCDs. Seems to be okay now after a few other attach attempts.
Another thing I noticed is that even though UEFI boot boots the vhd from the NTFS partition, it can't find any BCD when running BCDEdit . Both partitions were updated with the required boot files and BCDs via WinNTSetup. In BIOS boot (legacy) mode the BCD is found.