I understand that Inheritance can be passed tax free between husband and wife, however does this situation change where the husband is a UK citizen, but the wife is an American citizen living in the UK?
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domicile is the key
The key for IHT is domicle. I assume by "American Citizen" that the wife is US domicled. However, you need to be aware that there is a deemed domicle for IHT. If the wife has been resident in the UK for 17 out of the last 20 years, she will be deemed domiciled.
If she is not UK domicled, the spouse exemption is limited to £55,000.