Hi Arb,
Probably the most important thing is to get the investment set up as a 'bare trust', the alternative is a 'designated account' which just ends up getting added to your income / CGT for tax purposes. Under a bare trust, all the income / gains are counted as the child's so it makes full use of his zero-rated and lower tax-bands. The downside of the bare trust is that he gets full control at 18 - but if you're setting it up for his education, most of it will have been drawn down by then presumably. There are other trust options, but they can start to get expensive to administer. You'll need a solicitor to set one up, and then from there you can just pay in and trade on his behalf. Google 'bare trust' and you'll find lots of info.
I guess your brother has already cashed in his Child Trust Fund allowance and has that in equities? You can top that up to a total of £1200p.a. which is effectively like a mini-ISA for tax purposes (kids can't have ISAs in their names), although the downside is that you can't get to it until he's 18. So you could use the bare trust to pay for school, and the CTF for university.
Probably the biggest problem is that if you want this to be paying out from the age of 3, you're just not going to get enough head of steam going to generate a return, assuming you're not going to be trading it actively, or putting in tens of thousands to set it up. Probably better to pay nursery fees out of cash (the government helps with this, by the way), and let the fund build up until at least prep- if not junior or senior school.
