Try not to take it all personally, it is sad but don't let it upset you too much and don't let the boys see you are too upset. There are issues because:
-Your nephew is probably grieving because everything he has ever known has probably been taken away from him, please try and see that side of it
-Your child is too young to understand
-Your SIL doesn't sound very clued up on potential problems
-Your nephew has only just come but is older then the existing child
Instead of ushering the boys upstairs and out of sight she should have set up some shared play, IMHO. I would suggest next time some painting, colouring, junk modelling, craft, cake decorating etc on a table in sight of adults. The adults take turns to watch/interact with kids
Or you could have gone out to park, playground, for walk etc and again designated one adult to give kids me while others talked then swap, IMHO.
My ds was 3 when he came and dd was 9, I watched them like a hawk as they fought a lot!
Children with 'issues' probably do not need lots of unsupervised time IMHO. And most newly arrived children would have some issues.
Now my dd and her brother love each other but we did a lot of connection building things in early days...
we took them to fun places
we had a regular small soft play place to visit
they did dressing up together
they did junk modelling together
Plus please remember things you would expect of a regular kid sharing toys/being unsupervised etc not be possible yet for your new nephew.
Sorry if this sounds rude but ' I have to admit it broke my heart a bit' is a bit over the top, IMHO. Although you are, of course, entiteld to your feelings. It is hard.
It is always hard when our children are left out or not included but the reason is not the same as any other child being a bit mean (where one might insist on sharing).
The new child is not a playmate for your son but I know how you feel, our son was not a playmate for dd but it still felt hard when they did not play well! And of course this is one of the reasons why adopted children are younger than existing children within families!
Lastly we have a rule, any toys that cannot be shared must be kept in the children's bedrooms. Toys in living room, bathroom, things in the garden etc must be shared.
Maybe talk to your SIL or get DH to talk to his sis and suggest ways to work this out for next time.
It will get better! Honestly, I am 99% sure! 