Usually just a small piece of trim it put in front of the lighting, this will not completly keep you from seeing the lights on the side when you look inside the niche, I would be tempted to just light from the top.

I personally think you should keep it painted. It would be a terrible job to get the paint off and maybe you will never get it right again if it all goes wrong. You will have to know what you are doing before you start that job. Take a look at these pics, maybe you could get some ideas from them. To make a room feel cosy and warm make sure you have interlined luxury fabric curtains as a starter. In the green pic, I'm thinking shades to match your suite, disregarding the ceiling obviously! I happen to like the gold too.

I think the strip LED lighting could work very well. In your case, you could either install inside the recess and behind a small lip or place quadrant in front of the lighting underneath the plynth. The LED strips are designed ideally to sit behind a lip so that you can't see the strips. Here's a link to how it's installed LED strip light positioning you could therefore, potentially have it right round the top and above the cabinets as mood lighting.

our revamped kitchen will have a vaulted ceiling which we wish to light with a light strip (as well as pendant lights). We have used `Phillips hue elsewhere and like the flexibility of this. but not sure we can get this in the length (approx 2m x 4m) and whether there are more appropriate alternatives. many thanks