It's a play on words assuming that you know both meanings of all 3 words, which the audience clearly did.

Also, it was during a time when people were becoming more aware of queer rights and those words were becoming offensive to more Americans, part of the joke, kinda like "you should never say this in the US, but in the UK it's totally acceptable because all the words have different meanings than in the US"

It's also a play on linguistic drift as mentioned in another post. It's also hanging a lantern on how unacceptable that kind of language had become and in that sense was progressive.

I cannot think of a way that joke flies in the US today unless in a meta context of old jokes, which this meme attempts.

Hopefully this explanation has made the joke completely unfunny at this point.

Hahahahh