IHTM31550 | Assessing: calculating interest: manual adjustments to COMPASS interest calculations

There are a number of occasions where you may need to check the way COMPASS has calculated interest and manually adjust it. The following scenarios apply to without interest relief calculations that remain taxpaying:

Scenario 1

If supplementary interest is charged in the adjustment box COMPASS may not always repay it.

You should check whether any supplementary interest has been charged. If it has you should calculate the amount to be repaid

Scenario 2

When interest previously charged at Box 2 has been reduced, as money was held on deposit, COMPASS will repay too much interest. It does this because it can not recognise that the deposit was previously taken into account.

You should check whether a deposit restricted interest charged on previous calculations. If so, you will need to adjust the interest to be repaid accordingly.

Scenario 3

Repayments on Instalments. Where the tax repayable is more than the tax actually paid at the last calculation the formula (P-R) will give the wrong answer.

For example, £10,000 tax is due on a property. The first instalment is for £1,000 tax. The second is also for £1,000 tax and interest is charged on the unpaid tax, £9,000. At the moment, if the total tax were to be reduced to somewhere between £1 and £1,000, COMPASS would repay interest as if it had been charged on £10,000 at Box 2 Column A and d not £9,000.

Interest must be calculated from first principles. If tax is still due the interest to be repaid will be less than the total interest charged to date.

Scenario 4

Where:

• all the tax is paid on the instalment option property, after two or more instalments have been paid, and

• then there is a decrease in the tax due.

COMPASS will ‘forget’ that interest was charged on the unpaid tax on the second instalment.

Check that all the values and dates for which interest has been calculated tie in with the interest to be repaid. Check all instalment option calculations, not just the last one. If the values do not tie in, make the necessary adjustments. In this case you will need to increase the interest to be repaid. The interest should be calculated on the total tax that was due, less the total tax that is now due, for the periods where interest was charged at box 2 column A.

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Scenario 5

Because COMPASS cannot recognise individual assets, it gets ‘confused’ when assets move from sold to unsold. As an example:

An estate contains two properties - ‘Treetops’ and ‘The Grange’ All the tax is paid on ‘Treetops’ before six months from the date of death, so no interest is charged on the tax due on the property. We issue calculations for the tax on ‘The Grange’ as instalment option property, and two instalments are paid. So interest is charged on the unpaid tax on ‘The Grange’ when we collect tax on the second instalment. ‘The Grange’ is then sold so we collect all the tax due on it. Following this there is a decrease in the total IHT due. We should only repay interest on ‘The Grange’ as this is the only property that we charged interest on. But COMPASS will not understand this and repay as if interest had been charged on’ Treetops, as well as ‘The Grange’.

Check that all the values and dates for which interest has been calculated tie in with the interest to be repaid. Check all instalment option calculations, not just the last one. If the values do not tie in, make the necessary adjustments. In this case you need to decrease the interest to be repaid. To do this you need to work out the revised total tax due on ‘The Grange’ Take this from the old total for the tax due on ‘The Grange’. Calculate interest on the difference for the periods interest was charged at Box 2 Column A on ‘The Grange’.

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Scenario 6

You should remember that COMPASS is not generally robust at Box 3 in either column after a calculation has been issued that has an interest calculation in box 3.

Some of the general problems (IHTM31195) may also affect the interest charge.