In the end we reformatted the external drive just to make sure what I did was correct then we disabled my seagate external backup drive. Then we reinstalled MacOS Big Sur by restarting and holding down the command button + R.
Basically what I have done previously but this time it gave me the option to decide which drive I wish to install it on. (Previously it just selected my external drive and asked me for my internet connection and password for my hub)
Once selected it also asked me for my internet connection and password for the hub and then the install process started.
It then quite automatically called up migration manager and basically created an all new mac on my external drive.
This then caused a slight problem with the setup process as it did not want to accept my password for my Apple ID.
I then contacted Apple again and after quite a few steps (they just wanted to be sure that my password was working correctly elsewhere i.e. signing in to my Apple ID on apple.com) we decided to sign out of my iCloud on my Mac and then signed in again with my normal password which I obviously had to verify via another device (My iPhone in this case). Also had to re-activate iCloud on my iPhone.
I also have my wife as a separate user on the system and when I signed into her side I had the same problem with iCloud - I had to do all the Sign Out and Sign into iCloud with verification on her iPhone and iPad too.
After that everything operated as usual and I now have a much faster computer but my environment looks a little different and I am not sure that all my documents etc. is actually in iCloud or just on my external disk - although that's luckily not that important to me and I will notice in time whether that also works - although I can see all my data perfectly well in the various applications.
Hope this helps and hopefully I did not leave anything out.