Nearly two million people said they planned to downsize last year after the stamp duty holiday removed one of the biggest obstacles to the move, according to property builders Audley Villages.
It comes as thousands more are expected to pay the death toll this year due to high pandemic death rates and soaring house prices.
Sean McCann of NFU Mutual Advisors said the rules were “horribly complex”.
“They’re meant to keep people from struggling in big houses to get the most out of the tax breaks on their homes, but it’s the families who have to claim the addition and most lay executors have no idea. that it exists at all.
“More people are downsizing due to the stamp duty holiday and our aging population means more people are selling their homes and moving into care.
“Plus, the rules apply to anyone who has sold their home or downsized to a smaller property since July 2015. This means the window on claims is getting longer and more people will be trapped over time, unnecessarily losing thousands of dollars to the IRS. ”
Missing out can cost families six-figure sums.
As an example, consider a widow who sold her house in 2018 for £ 400,000 and moved into residential care, but died later in 2020, leaving £ 650,000 in investments and £ 350,000 in cash to his family.
Her relatives use her and her ex-husband’s main IHT allowance so that the investment portfolio goes tax-free. They mistakenly believe that they cannot claim family housing allowance as the house has been sold before and are hit with a death tax bill of £ 140,000.
But by calling for the addition of downsizing, they could cut the tax bill entirely.
Families have two years to claim the allowance after death, although HM Revenue & Customs says it may consider subsequent claims under certain circumstances.
The OTS said the rules “will continue to confuse and cause problems unless a simpler way to achieve the same overall political result is found.”