Mission impossible

Re. Water in the gearbox oil: I would not disagree with any of the comments above. For what it is worth, given that you have already removed the subframe & Engine/gearbox assembly, it surely makes sense to split the gearbox from the engine, so that the clutch can be checked and (probably) replaced, unless you know that this job has been done.
I have read elsewhere that clutch release arms are prone to rusting and seizing. Given that your car was "Baptised", the chances that your clutch release arm has NOT started to corrode badly seems vanishingly small. I believe Mike Satur does an improved release arm with a grease nipple.
Once you have the gearbox out, you can look for signs of corrosion, and do at least a partial strip. There is good advice (3 pages with 7 photos) on this subject in Roger Parker's "MGF and TF Restoration Manual" The key point is that there is a circlip which MUST be removed before the main case can be lifted off. Once you have removed that, checking for corrosion should be easy and you will certainly be able to eliminate any remaining water and muck before a re-fill.
I have to say that I admire your determination to get that car refurbished! Hard to see it as an economically viable project, but I guess that is not the point!
Good Luck!:clap:

I would still stand by my original comment, less than a cup of clean water wouldn’t bother me, although Cobber’s sentiments are of value, especially to those who buy in his services.
The PG1 has been used in any number of cars in various ratio configuration & to the best of my knowledge has proved very reliable. Being a Honda derivative & used so frequently it’s probably not surprising there are lots of cheap offerings. There are rebuild videos on YouTube.
If you’re intended replacement is off known quality, with the correct collection of cogs & your peace of mind would be greater by fitting a fresh one, get to it. There are still folk who emerged from “make do & mend” families who did just that during the war & carried that forward, imbuing there offspring with those sensibilities & my wife & I belong to that strata.
It’s not just age nor wholly financial, geographical conditions come into play.
If you’ve been bombed out a beer crate is as good as a Chippendale.
M

I have been busy at work this week but I finished early today so I got stuck in.
I have been keen to find out why the clutch failed so gearbox off. It put up a good fight, probably because of corrosion but it's off!



I'm still thinking that the cause of all of my problems is due to the slave cylinder failure.

I always knew that this was always going to be a difficult project.:omg:

It's beer o'clock 🍺

I guess your thoughts will be turning towards a replacement box. The clutch plate will almost certainly be rusted to the flywheel & it's a replacement pressure plate I suspect. At least you'll be able to fit an actuator shaft with a lubrication channel & grease nipple.
M

I'm not quite sure what to say about this..

Inlet valves cylinders 1 & 4

Not too bad.

Cylinders 2 & 3


I really didn't expect to see this. 😕

When you pull the head, I think you’ll find that engine is well and truly snookered!
3 & 2 cyl valves would’ve been shut, trapping the water in the inlet ports, 1 & 4 cyl valves would’ve been open allowing the water to drain into the combustion chambers. I bet the rings and bores of cyl 1 & 4 are buggered.
You may as well look for an good engine and gearbox, or jack up the rear view mirror and put another MG under it

It's funny that you mentioned the rear view mirror..:nonod:
I will finish the strip down as I was hoping to keep the car as original as possible (it's looking very unlikely now)

Hmm, what next.

I understand why you should want to keep the car as original as possible. Its an early car in surprisingly good condition externally & you’ve already investing time & money. Although Cobber is recommending sliding a replacement car under the rear view mirror that’s creating another uncertainty. You can’t unsee what you’ve glanced through the ports but it’s been underwater & really what would you expect.
Early on in the rebuild you consider trying to start the engine, it’s probably a good job you didn’t, given time you’ll draw it back, cylinder hones aren’t expense if you need to get that far in.
I’ve seen engines drawn back from a worse condition than from what your pictures convey, get the lid off & have a squint inside.
M

I had a squint...

Rhymes with Yuck!

The head has stood up well to the ordeal, but - - - - - .

The most cost effective solution to that engine damage is replace it