The horse is yours!! Possession and all that. I would sell her to a good home and never have contact with the old owner, if he can even prove he was the old owner. You honored your end of the bargain, offering her for sale back to him. He refused to buy the horse, case closed.
A verbal contract is still a contract legally - they are just harder to prove. If he said he is giving you the horse - that is a verbal contract. In addition - even if he did try to get her back then he would owe money towards care, training, vet fees, etc.
Its a bluff - he is hoping you will bend to his will so he can then sell the horse.
I don't understand why you kept the horse after 2 months trial. You had stated the horse was yours and after 2 months she was not working out,you would return her.
You should have returned her then, and not put $$$$ into her.
If there is no bill of sale, then you can accumulate all of your receipts and ask for reimbursement of care AND training. I keep my horses in my back yard, no BO to pay, and I spend much more than $500.00/horse/year on feed, bedding and Vet bills, and my healthy horses just get regular innoculations, worming, etc., NO Chiro or other services. Plus I do things "on the cheap."
I agree that he is bluffing, but take him seriously. If you can find an atty, get one involved. Many times my atty DH has sent a letter and put an argument to rest. Small claims is up to ~$3k now, I think, and court costs would scare this guy off.