John Healey’s flagship tax break for entrepreneurs has been branded “bonkers” by leading economists, who warn its restrictive rules could punish startup growth and encourage founders to make decisions that damage productivity.

The new Founders’ Relief offers a 10 per cent capital gains tax rate on up to £10m of lifetime gains, but its complex eligibility requirements have sparked a backlash just days after the Chancellor unveiled the scheme in his Budget.

Helen Miller, director of the Institute for Fiscal Studies (IFS), warned that the relief could incentivise precisely the wrong behaviour.

“The more I’ve dug into the details of Founders’ Relief, the more bonkers I think it is”, she wrote on X. “It incentivises entrepreneurs to change behaviour in ways that would be bad for productivity”.

Tax expert Dan Neidle also argued that no entrepreneur could realistically plan around a tax incentive that might change before they sell their business.

Speaking on ITV’s Peston, he said founders relying on the rules remaining intact in a decade would have to be “somewhere between psychic and insane”.

A tax break for 600 founders

Under the proposed rules, entrepreneurs must have owned at least 25 per cent of their company when it began trading and meet a five-year ownership requirement.

Businesses must also satisfy at least two of three tests covering rapid revenue growth, employee growth or £1.5m in qualifying research and development spending. The Treasury estimates that just 600 individuals a year will qualify.

Entrepreneur Tim Creswick described the scheme as a “pointless lottery” in a lengthy LinkedIn critique, pointing out that five equal co-founders would automatically fail the shareholding test.

He also questioned why employment growth should determine eligibility when AI is allowing businesses to expand with fewer staff.

Miller warned that the rules could encourage founders to manipulate revenue growth, sell businesses prematurely or avoid changing their business models to preserve eligibility.

Positive initial reaction

The criticism marks a reversal from the initial reaction to Wednesday’s Budget.

Brent Hoberman, co-founder of Founders Forum Group, said entrepreneurs would “breathe a sigh of relief”, while Honest Mobile chief executive Andy Aitken called it an “incredible budget for founders in the UK”.

Healey also halved the lifetime allowance for Business Asset Disposal Relief from £1m to £500,000, leaving many established business owners facing higher tax bills.

The new scheme is expected to cost the Treasury £260m in 2027–28, while restricting the existing relief will raise £60m.

Dame Anne Glover, chief executive of Amadeus Capital Partners, warned that the changes presented a “mixed picture for entrepreneurs”.

Neidle accused ministers of “throwing money out because they think it looks good”,while Miller argued that the money would be better spent fixing the underlying capital gains tax system.

The Treasury defended the proposals, saying they were designed to reward founders who create jobs rather than offer a broad tax break on business sales.

The scheme remains under consultation until 30 November, ahead of its planned introduction in April 2027.