In case anybody needs to know for the future this was eventually done after 14 phone calls. I've been hung on more times than I count. Iberia agents clearly have not been trained on how to handle these types of requests and did not know how to action them. The agent I finally got through to at Iberia Plus in Spain said she could do it for me but I would have to pay a £25 cancellation fee and £15 offline service fee. Iberia.com says these Avios&Money hotel bookings can be cancelled online through the 'Your Trips' section but in reality this feature has been removed (as confirmed by an Iberia agent). I did argue that there was no way I could actually cancel the booking online and that the feature to do so had been removed from the website but she wouldn't believe me and kept saying there was no issues on the website and that I would have to pay for the fee if I wanted it doing. Have spent over 2 hours going round and round in the Iberia system I just paid it and said I would complain later.

Through this experience I have a new found respect for how professional and helpful BA contact centre staff are.