IHTM31665 - Repayments: interest supplement

Under IHTA84/S235 any repayment of tax or interest itself attracts interest

• from the date on which the payment was made
• up to the date the repayment order is issued

The extra payment, which is made as compensation to the taxpayer for the delayed repayment, is called ‘interest supplement’. The supplement is paid regardless of

• whether the sum is actually repaid to the parties or is repaid notionally by applying it towards an assessment of tax payable
• the fact that the parties may not have paid any interest on the tax overpaid.

You must decide the appropriate dates from which the interest supplement starts. Accounts Office Shipley (AOS) will then calculate the interest supplement up to the date they make the Payable Order.

What you need to do

At the appropriate section of the Sect 6 (IHTM31641), show

• the amount repayable and
• the start date for the interest supplement.

You do not need to show the various rates of interest that may apply, or the end date for the interest calculation.

More than one payment made

If there has been only one payment at your assessment group (IHTM31012), the date of that payment is the start date for interest supplement.

If however there have been a number of assessments and payments at that assessment group, repay the amounts in chronological order, under the “last in, first out” basis.

This means that you will calculate interest supplement from the later dates of payment first, irrespective of whether the payments related to tax or interest.

Example

The deceased died on 25 November 2001

• In addition to tax on failed PETs (IHTM14512), tax was paid on the free estate on delivery of the account on 20 January 2002 of £50,000 on NIOP and £2,000 on IOP.
• Further tax and interest was paid following assessed adjustments of £5,000 on NIOP and £21,000 on IOP on 6 June 2002.

The amount now repayable is £12,000 on NIOP only.

Your instructions on the Sect 6 should be to allow interest on

• £5,000 from 6 June 2002
• £7,000 from 20 January 2002.

Last-in, first-out principle: tax and interest

The purpose of a repayment is to put the taxpayer back in the position that they would have been in had the correct value of the estate been known at the outset. The principle of adding repayment supplement is for the Exchequer/HMRC:IHT to compensate the taxpayer as they did not have the use of their money while it was in our hands (in the same way that we charge interest where we have not received money when it was due). How we applied that money -whether tax or interest- is irrelevant, the only questions that need to be asked are

• Have we had the use of money to which it was not entitled, and
• for what period?

Example

£10,000 tax was due on 30 June 02, but paid on 13 January 03. Interest was then assessed at £161.48 and paid on 10 March 03.

The IHT liability was subsequently reduced to £8,000. Had the correct amount of tax been paid from the start, the interest charge would have been £129.18. £8,129.18 is therefore the amount of money to which we were entitled from the estate.

The taxpayer paid £10,161.48, giving a refund due of £2,032.30. This is the amount that we had the use of but were not entitled to. We need to compensate the taxpayer by way of interest supplement on the sum of £161.48 from 10 March 03 and the remainder from 13 January 2003.

It would not be correct to pay interest supplement from 13 January 03 on the tax that was overpaid. At that time, if the correct position had been known the amount owed was £8,129.18, but £10,000 was paid. So, from that date only £1,870.82 (not £2,000) had been overpaid and interest supplement can only be paid on that amount from that date.

(This text has been withheld because of exemptions in the Freedom of Information Act 2000)