IO540
I believe that operating a G registered aircraft on an FAA licence after failing the medical for a UK licence may be contrary to article 26(3)(a) of the Air Navigation Order:
A person shall not be entitled to act as a member of the flight crew of an aircraft registered in the United Kingdom if he knows or suspects that his physical or mental condition renders him temporarily or permanently unfit to perform such functions or to act in such capacity.
I also recall discussing this issue with the CAA in the past. I believe that they take a very dim view of a person trying to avoid UK medical requirements by using a foreign licence/aircraft. If I recall correctly they would normally consider a direction under article 21 of the Order to invalidate the use of the licence in the UK.