It'd be something if an LL behaving like this were so unheard of that this could only be a joke or a wind up. Sadly for those of us who've experienced similar as tenants it's all too believable!
Some LLs have the attitude that they're doing their tenants some massive favour, like they get nothing from the whole arrangement and that clearly they are better than the tenants because they own property and the tenants are renting.
Sounds to me that's exactly the attitude OP has, despite actually admitting breaking the law herself (to which she responded to being told that "the world has gone mad" and shouldn't have needed telling because she should know as an LL) wanting to keep the deposit she hasn't protected because she doesn't want to support the tenants 'lifestyle' despite the fact that she's only got her supposition to support that suspicion (because as tenants it must be weed right?!) And the fact it's their money to start with, so she's actually returning what is theirs after they return what is hers. And that as it's their money she has no right to withhold it because she doesn't agree with the lifestyle she's decided they have - she's not doing them a favour by returning the money no more than they're doing her a favour returning the house!
And I would think that an 'informal' let means no other legalities have been observed including paying tax on the income from the rent or a tenancy agreement and safety checks. And the 'below market rent' is because of all that and the fact it's all been done under the table as it were.
She still thinks she's in the right for no other reason than she owns the property.
Granted she's refunded the deposit now, but clearly because she's realised that she'd be in deep shit if she didn't and tried to withhold it and if people started actually looking at the rental in any detail then she'd likely have to face the concequences of what she's been doing. So another completely self serving act.
I really hope that your previous tenants somehow get wind of the unfounded allegations and the fact you didn't protect their deposit and report you for not doing so anyway. It's the least you deserve to face the concequences of your own actions.
And you're really going to struggle with hosting holiday makers, the general public, the guest and customer with the attitude you have. They're a lot more demanding and picky than long term tenants and you're going to get some where nothing is good enough, where they're actively looking for something to complain about and if they don't find it, then they'll make it up (pretty much what you've done here with your tenants) and they expect you to put it right immediately or give compensation. You're not going to enjoy not being top dog there, you'll be providing a service and expected to provide that and more on demand. And you'll face the shitty reviews when you don't, and people aren't afraid to let rip on reviews either!
And that's before you get to the people who will trash the place, have parties, use actual drugs and leave you with the mess, smoke inside and leave their ash and cig ends wherever they like.
I'd suggest selling the place tbh because you're clearly not cut out for being a landlord of any description.