  We present X-ray and optical observations of the short duration gamma-ray
burst GRB 071227 and its host at $z=0.381$, obtained using \textit{Swift},
Gemini South and the Very Large Telescope. We identify a short-lived and
moderately bright optical transient, with flux significantly in excess of that
expected from a simple extrapolation of the X-ray spectrum at 0.2-0.3 days
after burst. We fit the SED with afterglow models allowing for high extinction
and thermal emission models that approximate a kilonova to assess the excess'
origins. While some kilonova contribution is plausible, it is not favoured due
to the low temperature and high luminosity required, implying superluminal
expansion and a large ejecta mass of $\sim 0.1$ M$_{\odot}$. We find, instead,
that the transient is broadly consistent with power-law spectra with additional
dust extinction of $E(B-V)\sim0.4$ mag, although a possibly thermal excess
remains in the \textit{z}-band. We investigate the host, a spiral galaxy with
an edge-on orientation, resolving its spectrum along its major axis to
construct the galaxy rotation curve and analyse the star formation and chemical
properties. The integrated host emission shows evidence for high extinction,
consistent with the afterglow findings. The metallicity and extinction are
consistent with previous studies of this host and indicate the galaxy is a
typical, but dusty, late-type SGRB host.
