Each child born after 1 September 2002 is eligible for a £250 voucher (£500 for low income families) which can be used to make an investment on behalf of the child through an investment institution approved to sell Child Trust Funds, of which there are around 40. ( see http://www.childtrustfund.gov.uk/templates/Page____1243.aspx ) The amount invested can be topped up to £1200 per year through gifts from parents, grandparents or friends. When the child is 7, the Government makes a second payment of £250 or £500.
The investment can be into a cash account, a shares account or a ‘stockholder ‘account which is a shares account which is switched into less risky assets as the child approaches the age of 18, at which point the fund accrues to the child. During its life there is no tax on income or capital gains on the Child Trust fund. But remember that you cannot access the money until the child is 18 and at that point it belongs to the child who can spend it as he/she wishes.