I've read with interest a few threads where folk in the US have had flag issues. They have cropped up here in Australia as well, but it's usually the local council and in one memorable episode a few years ago, the complaints were fueled by immigrants feeling offended by the ANF (Australian National Flag) being flown in "their" street.
However, if a VC recipient wanted to fly a flag, I don't think any local authority would have the guts to protest. After all, Her Majesty's own Palace Guard is bound to obey the orders of a VC survivor regardless of the worn rank....what's a local council going to do?
Whilst I disagree with people using "patriotism" as a vehicle to get their own way, I do personally feel that if you survived a CMOH or a VC award, then you've earnt a little leeway.
Not that my opinion in this matter is worth diddly.