Thanks to the STW forum for all the comments/advice –
I agree that British built + Reynolds 725 probably isn't enough.British built, Reynolds 725 and available off the peg immediately for £500 is beginning to look more attractive. However, noting how long it took Merlin to sell out of RM Blizzards at a bargain £399, upmarket steel hardtails per se can't be in that much demand, so it's got to be something a bit special combined with British and off the peg.
One of the reasons I've been thinking about this is because I was looking around for a steel s/s frame and there really didn't seem to be much between the one-one/Genesis/voodoo frames at the sub £300 mark and the £1000+ US boutique brands, particularly if you are looking for a light XC type frame
So my thinking so far, two slidy dropout models built as light and zingy as possible:
1.an ultra flexible 29er with rigid forks, loads of mud room and disc friendly guard and rack mounts, useable as a mainsteam MTB or for light touring with different wheels, bars etc
2. a light mainstream 26er designed for a 120mm fork