Thanks Koraks! I put the diodes in for reverse current protection. I know it's not the best way but the circuit worked just like this before i put them in.
I have much more headroom if I supply the linear regulator as it can take 7-12V with no problem. The spike would have fried the board already.
It's a 470uF capacitor so it shouldn't a problem.
The mpu and level shifter connection is pretty standard and the problem occurs even if the level shifter and the board is not connected that's why I didn't bother to explain it further.
The reset pin is a good idea I will try that. Thanks!