Thanks to Sam and gezb I now have bluetooth working with my headphones.
For anyone else with a RPi3 who purchases the OSMC dongle here are the steps in one place (probably a good idea to back up your RPi build before doing this):
I. In terminal enter:
echo "deb http://apt.osmc.tv krypton main" >> /etc/apt/sources.list
apt-get -y dist-upgrade && reboot
Result: Changed to OSMC skin, Kodi now 17.0-RC1
II. Downloaded confluence skin - everything now looks like it did before(My-OSMC no longer shows in System sub menu - but can access through Programs).
Cannot pair to bluetooth devices yet
III. Checked config.txt (onboard BT disabled). The lines I had added were:
(the last line disables wifi - omit if you don't want to - but I think some posts suggest it may interfere with bluetooth)
IV. In terminal enter:
sudo apt-get install -f a2dp-app-osmc
(perhaps reboot here)
V. Go into addons -> Services and enable BTPlayer
VI. Now able to pair headphones from Network menu in My-OSMC!!!! - Success
VII. In Kodi go into System ->Settings ->System -.Audio
change Audio Output to: ALSA: OSMC streaming to bluetooth...
I also changed Output Configuration to: Best Match (think this aligned sound and video better)
All the Best