Hi! I am in the EXACT same situation. I am hoping that due to how old this post is, that maybe you've been through and are on the other side of this mess. Husband spent his childhood in England and moved back to the US when he was 12-13 years old. I have found the same "loophole" or "way in" and am wondering if this was successful for you. It seems as if this is the way to go. Hubby applied for his British passport today after consulting with the UK Passport office who advised he was good to go. Help! We are looking to move April 2016.
It's not a loophole but it's something that is allowed if their British citizen by descent parent spent 3 years in the UK before the children were born and if the children are still minors.
http://britishexpats.com/forum/citizenship-passports-spouse-family-visas-uk-196/moving-back-uk-non-british-citizen-children-862049/That link to another forum gives the relevant part of the Acts, but it is worth noting what is said that the children will be British citizens by descent, which means if they have children born abroad they they won't be allowed to register as British citizens.
Link shamelessly copied for future reference with thanks to that poster and which raindayrun also mentioned.
British Nationality Act 1981Acquisition by registration: minors.under 3 (2)
http://www.legislation.gov.uk/ukpga/1981/61/section/3That person also said that if the British citizen by descent parent sponsors their children and they enter the UK on visas, after 3 years they can be registered as British citizens otherwise than by descent. 3 (5) of that same link. Any of their children born abroad (your grandchildren) will then be born British citizens by descent. I assume your children will still have to be minors when registed for this???
It's all under present laws of course.
Once a person is British citizen by descent, they can't change/upgrade to British citizen otherwise than by descent.
I'm not sure anyone on here can help and you may do better asking on that Brit ex pat community as they seem to know.