Thanks for your update.
I really did a lot of tests in the latest version of Outlook desktop client (Outlook 365 Version 2007 13029.20308) and found some interestring things. I have two separate Outlook client(both are the same version), and after doing tests about autoformats, I got different result: one can work fine and the other has the same issue as you encountered. So, I'm afraid that this issue may not be related to the Outlook version. I also tried to modify their AutoCorrect Options via File > Options > Mail > Spellng and AutoCorrect > AutoCorrect Options to make their settings the same. However, the issue still exist.
I will keep on researching about your issue. Any updates I have, I will reply as soon as possible. Thanks for your understanding and support.
Update:
Sorry for the delay. I really did a lot of research during the past few days:
Tried to make their all Outlook settings in client the same, not work.
Tried to make their outlook template the same, not work.
I found that in Outlook 2016, this feature could work fine without any issues. So I also tried to make all the Outlook 365 settings the same with Outlook 2016, not work.
And those two test clients both have this issue again, after I updated them to the latest version.
Can you still remember the Outlook 365 version in which you can successfully use this feature? If so, please try to provide the version number to me so that I could try to search the update release and see if we could get more related information there.
To avoid this issue, I got a workaround. We could make Outlook paste with no format and then this feature can work fine. Please check the settings like below and see if it could helps.(File>Options>Mail>Edit Options>Advanced)
Besides, if this issue indeed cause lots of trouble to you, it is also suggested to use Outlook 2016 or revert to the older version in which this feature can work fine. Sorry for the inconvenience to you again. Grateful to your understanding.