Neither. The in time is out of context. What should be looking at is back in time. It says that she has told the end of the story, but is going back before the ending to tell how Heathcliff died. Almost like a add-on.
Yes - going back to something that happened earlier. Taken literally, and with the science fiction of today, it could be taken to mean traveling back in time to an earlier period, but of course we know it's not that .....
As was pointed out, you accidentally took 'in time' by itself when the complete idea is 'back in time'. So this means, as was already pointed out, to travel backwards in time figuratively by telling a story from the past.
There is no other way to construct this phrase to make the meaning clearer, if you wanted to communicate the idea that someone returned to a place without being late, e.g. 'went back (to work) in time (for the meeting)', you'd say the same thing: 'went back in time'. You might say 'got back in time' but 'went back..' is just as grammatically correct. The only minor difference is that 'got back' is like 'arrived', and 'went back' is the actual 'going' action. Either way you weren't late.
As a native speaker, the reason why I don't mix them up is thanks to the context. From the context we already know that no one is travelling anywhere and telling the story does not involve going to another physical destination. That's it, no magic.
I think this sentence is very vague and not written very well. The part, "Nelly went back in time to describe Heathcliff's death." makes it seem as though the reason he "went back in time" was so that he could describe Heathcliff's death. This is confusing because you can infer that he did not really physically travel to the past, but brought up perhaps memories by telling Heathcliff's death. I could be wrong though so please correct me if I am.
Well, if one wants to be nitpicky, it's actually backwards in time. The -wards ending is used to indicate direction, but is often dropped in informal speech.