Can I say thanks very much to all who have offered assistance and their views on this thread.
I took the chance to drive up to Davies at Newport on Tay today.
Nice day for a drive and to clear my head and do a bit of thinking.
Davie echoed what many have said, that this is old damage and has been like that for a while. Also confirmed that without the DIY confidence to try fixing something like this myself and the slim chance nothing else being wrong with the engine, then it's pretty much a write off. Thanks for taking the time Davie, I appreciate how busy you are (if you're reading this).
Since the seller says that he hadn't notice the damage and said he was as honest as possible about condition 'good condition, everything working as it should', we are at a bit of an impasse.
I paid £1750 for the package.
Boat and trailer were worth £800-900, exact same for engine.
Boat and trailer are still worth that, give or take. Engine is worth scrap - what, £150.
So that leaves me paying £1750 for something that is worth ABSOLUTE MAXIMUM £1050.
I propose to ask the seller to split the difference with me, as he has indicated that he is open to resolving this.