Is this bush knackered?

You even ask? It should be tight on the ARB
If not done you'll be due for a refresh of the droplinks (which you're doing) lollipops and ideally the wishbones with 2 ball joints on them.
Do the lot and have a realignment done
 
with that gap you should have heard some different noises going on
 
I've fitted poly bushes to my Golf GTI, I wouldn't do it again, nice and tight but too harsh.
 
If it was jacked up then I'd expect that from a tired original bushing. New rubber are about £6 each from BMW, poly about £40 a pair from CarParts4Less. I swapped mine for rubber but will be changing to poly soon.
 
I would not touch poly unlesss you are trying to make everything solid for tracknuse. It's harsh, can groan and transmits noise and vibration
 
Go OEM. I polybushed my last car and with the state of the roads today the noise was awful and actually made me wince at times in the car.
 
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