Children's Bonus Bonds
If you wish to choose an option that is tax free, you could invest funds for your child into a National Savings plan. These plans are exempt from tax on the income, and capital gains, even if the bond is bought by the parent.
The most recent Children's Bonus Bonds pay a fixed rate of 4.4%/year for the course of 5 years. The minimum you can invest is £25, the maximum £1000. These plans are available to children under 16, and can be left until the child has reached the age of 21.
Saga is offering a bond for Grandparents to set up for their grandchildren, the rate of interest on these bonds are linked to the Halifax House price index. This plan offers double the growth of the index over the next 15 years.
Bonds are reasonably low risk, you will not loose any capital, but depending on how well the business you are investing in performs, you may receive very good or reasonably poor returns.