It turned out the upper sealing face on the thermostat housing wasn't flat and it would just leak no matter what I tried. At first I thought it was the old raidiator hose so went and bought a new one only to find the leak was still there.
So got out the Stag and made a 0.2mm gasket, installed it and left it overnight for the Stag to go off only to find it was still leaking.
Now to get that upper sealing face flat I got 1/2" thick round brass plate and put some medium grinding paste on. Then for about 10 minutes gave it a rub on the face until I was happy the surface was refaced and would provide a good seal.
Made up 0.4mm gasket this time and used the Stag again and found it had stopped leaking and the heater was working nicely.
So all this time the engine was low on coolant but never over heated and it didn't damage the engine.
O'well with sub zero temps every morning it's great to get the heater working.