Unless the defendant can show that it was intended inoffensively, it must be assumed he was using it abusively. After all, you never hear of someone punching someone in the mouth, whilst saying "you no good red-head", or "you *** person with grey-blue eyes", do you?

As for your relative, well I dislike Mormonism as much as the next atheist, but I suspect her of pigeonholing assumptions.

No, stereotyping words with history of discriminatory intention should not be in normal use until the stereotyping and discrimination have stopped so long ago that it no longer carries the baggage. So it's OK to call someone a quaker, or a left-footer (except in Northern Ireland), but Yid, Paki, raghead, nigger etc... no they are definitely offensive. When people use them (barring rare 'safe' circumstances where everyone understands and agrees) they can be taken as INTENDED as offensive.