What - Altered coin. Where - At the person's workshop. Why - Only the person that made it would know! Not an error.
As mentioned, it's a so-called "magician's coin". Someone (outside the mint) machined out the reverse of a pound coin and mounted the penny into it. This is not something that happens inside the mint. As such, it is a post-mint alteration, not an error. It's neat-looking, but merely a novelty item. Still a fun find, and a conversation piece. It fits nicely with the old "in for a penny, in for a pound" saying. Since you're literally "in for a pound", and you came out with £1.01 in the form of a fun novelty piece, you're slightly ahead anyway, despite it not being an error coin. Here's another video, showing the process involved in making this sort of thing.
