Another way of looking at the whole issue, and it can be applied to many other areas, is whether the fact that the two people involved are living with dementia inevitably means that there are different rules that should be applied to them by people who aren't living with dementia and therefore know 'better'. Many people not living with dementia get themselves into relationships which their 'loved ones' and others deem ill-advised, misunderstand what the other person in the relationship really wants, abuse the other person mentally and physically sometimes to the point of murder, and generally make their close relatives very unhappy.
As I've said previously, where any line should be drawn is surely where coercion enters the picture and not where things becomes physical, just as in any other relationship between two people. It may be difficult to prove coercion, and such a reltionship may upset other people, become embarrassing to other people. make life complicated - all things that can happen when any relationship between any two human beings develops.
Take a situation where two people in a care home living with dementia and having no living family develop a relationship which becomes physical. Is that 'acceptable'?
I'm not sure either whether the 'capacity test' helps. People can easily disagree about capacity, which is a slippery concept at the best of times.