anyway Apple marketing suggests that the wireless connection to a Time Capsule should be "brilliant", so why would iTunes regularly get lost and access be slow??
Simply because the Time Capsule was designed to store Time Machine backups......not "active" or "working" libraries. You need a real media server for that....and the Time Capsule is not that product.
No one is stopping you from trying this if you want.....but having tried this myself a few times, I think you will find that it is a lot more trouble that it is worth and it creates more problems than it solves.
My main question however was if I could simply drag the files into the TC or whether I needed separate partitions(?) and reformatting, etc.?
The Time Capsule drive can be partitioned, but it is not recommended. Here are the basics:
Open up the Time Capsule.....(which voids the warranty on the product)
Pull the hard drive
Install the hard drive in a separate SATA to USB caddy
Connect the caddy directly to your Mac
Use Disk Utility to partition the drive
Reinstall the drive back in the Time Capsule
Hope that it will work
If you try to format the Time Capsule drive, that will erase everything else on the drive, so you really have no choice but to install everything right on the Time Capsule drive.
Here is how to move the iTunes Library over to the Time Capsule........Locate and organize your iTunes media files - Apple Support
But, before you do this, you might want to look over Apple's information sheet on the Time Capsule to verify that Apple does not mention what you want to do anywhere in the product information for the Time Capsule. There just might be a reason for that.
http://www.apple.com/airport-time-capsule/