Install OSX onto Time Capsule to recover iMac

I have an iMac which I cannot log into after trying to install High Sierra. I don't want to wipe the hard disk as there are files I do not have backed up (FileVault is enabled)

I have tried Recovery OS to reinstall Sierra, I have tried install by using a bootable USB Key with Sierra. Nothing seems to be working.

I thought I could install Sierra onto an external drive, boot from that and then access the internal drive to recover the files. So I am trying to use a new 3TB Time Capsule for this, connected using an Ethernet cable. Booted the iMac into recovery OS to try to install Sierra , but I cannot see the new drive.

Is this because a Time Capsule cannot be used in this way, or am I doing something wrong?