Hi Chris,
I'll join all the others who have recommended H0/00. We just had the yearly model expo here and I was again looking at all the trains there (amongst other things) with my older boy. Plenty of nice layouts in all scales.
If you look at the way the owners operate their railways in a show, you will spot one difference between the N and H0/00 crowd. The N-people mostly use tweezers to connect and disconnect carriages whilst the H0/00 people do not. It is also a lot more fiddly to put N-scale trains on the tracks compared to H0/00 and it is also more difficult to build N-scale layouts so that the trains stay on the tracks (if you build modules then the transition from one module to the next is harder to get right on N due to the smaller size). Thus for kids I'd definitely say go for H0/00 and not N.
However, I've seen some very nice N-scale layouts and N-scale goes very well with permanent and semi-permanent layouts at home. It does take less space and you can build the layout on a piece of plywood and store it upright or even hang it 5 cm from the ceiling when not using it.
H0/00 takes more space for a semi-permanent installation but then again it is more suitable for a "build it and then disassemble it next week" type installation. For H0 (I don't know if this holds for 00 in England too) you will also have to decide between the 2-rail and 3-rail tracks. 3-rail is Märklin, 2-rail is more or less everyone else. 3-rail (meaning you have the small studs at the center between the rails) is very easy for "build and disassemble" as you don't have to worry about loops and change of direction. On the 3-rail the center is "+" and the two rails both are "-". On the 2-rail one rail is + and the other rail is -. If you have a loop where the train changes direction and comes back to the same track, then you have a problem (draw this on a piece of scrap paper and you will understand what I mean). So with 2-rail either avoid loops or ask the other 2-rail people what the solution is (there is a solution but I am not familiar with the details...) This is also the reason why you cannot put Märklin carriages on the 2-rail system but you can do it the other way around (On Märklin carriages the wheels are NOT insulated, on the other system they MUST be.) (Note: I took some liberties with the "+" and "-" above to simplify the explanation; actually I think Märklin is AC but anyway the above is good enough to understand the difference between 2-rail and 3-rail operation).
Anyway due to the age of your kids the correct choice is none of the above (sorry to disappoint you). I wouldn't let kids younger than 7-10 play unsupervised with the "real" train sets in any scale as they are not robust enough... The correct one for younger kids is BRIO (
http://www.brio.net/en/ToPlay.aspx) (I hope the link is ok by forum rules). The younger kids 2+ can play with the push trains and the older ones can use the battery operated ones. There are even remote-controlled Brio engines nowadays. I'd say from 2 to about 8-9 the Brio is the best and
then you can go to the H0/00 and other more realistic ones. The Brio has wooden tracks that are almost impossible to break and they are easy for young children to build by themselves. Just buy lots of straights (get plenty of the very small ones too as you need those for fine tuning) and curves (prefer the normal curves, the short ones turn a little too fast for the battery operated trains) and turnouts (remember there are two kinds of turnouts: the "plain" aka no-control and the "mechanical" where you can control where the trains goes; for the battery trains be sure to buy the latter type). Do not buy any of the lifting bridges and any of the pieces where the track is built elevated as those get knocked down during play; do buy some of the intersections and some of the fixed bridges as those are nice.
If you are interested I can attach a few pics of the Brio layouts that we have done over the years.
The above is one person's opinion but it has been play-tested for 7 years (my older is now 9 and the younger is 7). Oh, and If your wife asks then H0/00 is fine as we all know it wasn't meant for the kids anyway
Cheers,
Jari
(My personal plan is to install a G-scale (45mm, gauge 1) garden railway in the back yard "for the kids". We moved in at the end of last summer and there is still some things to finish on the house and the yard before the railway construction can start (plus need a little money for that, too, but isn't that always the case?). The house was built during the previous year, which has kept us pretty busy and also partly explains my very intermittent participation on this site... Anyway I already have the most important ingredient for succesfull railway construction: the wife's permission to do so. I don't think she fully realised what she promised when she accepted the garden railway for the back yard but I drop some hints every now and then to keep her interest up
. This is a very long-term project so don't expect any pictures of this in the next few years or so...)