A new tax rate of 10 per cent capital gains on up to £10m lifetime gains is designed to encourage and reward founders, but the draft rules are so narrowly drawn that hardly anyone will qualify, says John Manis

In the film , the heroine’s father, Alfred P Doolittle, makes a memorable case for charity to the undeserving, including himself. His needs, he explains, are every bit as great as the most deserving widow’s – but, as he puts it: “if there’s anything going, and I put in for a bit of it, it’s always the same story: ‘You’re undeserving, so you can’t have it.’”

The new relief – a 10 per cent rate of capital gains tax on up to £10m of lifetime gains – is designed to encourage and reward founders. The draft rules are narrowly drawn. A claimant must have held at least 25 per cent of the ordinary shares and votes when trading, or preparations for it, began. They must have held them for five years, and been a UK resident for five continuous tax years. Broadly, the company needs £10m of turnover and 15 full-time staff, plus two of three tests: 25 per cent compound annual growth over three years in turnover, the same in headcount, or recent R&D relief claims on £1.5m of spending.

The intention is that only genuine founders or early investors in the most exceptional “high-growth, innovative” companies qualify. Everyone else is, by implication, undeserving. Which raises the question: who, exactly, does the government think deserves it?

Anthropic wouldn’t qualify

If there is one kind of company the government should want founded – and kept – in the UK, it is a frontier artificial intelligence lab. Leaving aside the requirements linked to UK residence, consider how the rules would apply to one: Anthropic, which has just filed for a Nasdaq listing.

Anthropic had seven co-founders with near-equal shares, so none held the required 25 per cent at the outset. In fact, since no more than four people can each own a quarter of anything, no company can ever have more than four deserving founders. Other founders of AI companies are equally undeserving. OpenAI began life as a non-profit, so the most any of them could have held was a quarter of nothing. Closer to home, Deepmind’s founders would have been undeserving: Google bought the London lab in 2014, less than four years after it was founded.

Founders who had the foresight to pivot into better opportunities may also be undeserving, as the relief requires ‘no major change in the nature of the trade’. Hugging Face, which Nvidia has reportedly agreed to buy for $12.9bn, started life as a chatbot app for teenagers. It shut the app down to build the platform where AI developers share their models.

On the government’s definition, founding some of the world’s most valuable, fastest-growing and innovative companies is insufficient to qualify as deserving

So, on the government’s definition, founding some of the world’s most valuable, fastest-growing and innovative companies is insufficient to qualify as deserving. The issue is not just that the conditions for relief are strict. In principle, a limited but well-targeted relief is defensible, not least because the public finances leave the Chancellor so little room for manoeuvre. Arguably, however, the cumulative effect of all the conditions is to make the relief arbitrarily narrow rather than well-targeted. If Dario Amodei and his six Anthropic co-founders are not the type of founder the government had in mind, then who is? The Chancellor, John Healey, said of the relief that “this is how we make Britain the place where the companies of the future are built,” but most company founders may hear a different message: that, although there’s something going, ‘You’re undeserving, so you can’t have it.’

Alfred P Doolittle was eventually rescued from the ranks of the undeserving by an American millionaire. We should hope that the UK’s undeserving founders do not decide to be similarly rescued by America, or Dubai, or Switzerland.

John Manis is a tax partner at Crowe