THOUSANDS of middle-class families could become tax-free millionaires in just 10 years simply by using a combination of all their tax breaks and standard investment schemes.

A couple who each invested £28,600 a year across all their allowances would have a £1m portfolio by the end of a decade – free from income and capital-gains tax, according to research by Bestinvest, a financial adviser. They would have to invest £9,750 each a year to achieve the cherished millionaire status in 20 years.

Few families realise quite how much they could shelter from the taxman. In addition to their £14,000 Isa allowance, which rises to £14,400 next year, a couple could salt away an astonishing £300,000 in tax-free plans from National Savings & Investments, the government-backed agency.

Everyone can put £15,000 in each of its four savings certificates and there are usually two issues every year – a total allowance of £120,000 each. You could then put another £30,000 each in premium bonds.

However, the Bestinvest analysis assumes you invest only in index-linked savings certificates because they offer the best returns – and you do not even need to put aside the maximum to get to £1m in 10 years.

We show how you can build a £1m pot free from capital-gains and income tax.

Maximise your Isa allowance

Everyone can invest up to £7,000 in an Isa this tax year – rising to £7,200 next year – and income and capital growth are tax-free.

To maximise these tax breaks, advisers recommend investing your Isa allowance in equities because they tend to deliver higher capital growth than cash and bonds over the longer term (see below).

If you and your wife invested the maximum in Isas each year, or £72,000 over 10 years, they would be worth £106,048 at the end of the decade, assuming an annual growth rate of 7%. A couple could therefore be sitting on an investment pot worth more than £212,000.

Investment: £7,200 a year each (from 2008)

Value after 10 years: £212,096

Plough money into a pension

Pensions are one of the most tax-efficient ways of saving, and rules introduced in April last year mean you can now invest an amount equivalent to your annual salary – or up to £225,000 this year, whichever is lower – into a pension. Most people cannot afford to invest that amount but it is a useful way to mop up a big bonus or a windfall.

For our £1m portfolio, we assume a couple invest £10,000 each into a pension each year. This would grow to £147,836 after a decade, giving a joint total of £295,672.

The government gives tax relief on pension contributions – basic-rate taxpayers receive 22p for every 78p invested, while those in the higher-rate bracket can claim a further 18p through their tax return. This means that a higher-rate taxpayer would need to put away only £6,000 a year for every £10,000 gross contribution.

If you have a company pension, it is nearly always worth joining because your employer may make monthly contributions.

Investment: £6,000 a year each (with tax relief)

Value after 10 years:£295,672

Don’t forget National Savings

National Savings & Investments’ index-linked savings certificates are not only tax-free; they also protect against inflation and are offering one of the best deals around for higher-rate taxpayers.

The return is made up of a set rate of interest plus retail price inflation (RPI), fixed for three or five years. Both the three-year and five-year certificates are paying RPI plus 1.35% – this equates to 5.75% and is equivalent to a rate of 9.58% for higher-rate taxpayers and 7.19% in the basic tax band.

Everyone can invest up to £15,000 per issue, meaning you could shelter £30,000 in both the three and five-year plans.

On average National Savings launches two issues a year, so you could each keep £60,000 out of reach of the taxman in any one year.

To reach our £1m target, though, you need to invest just £7,500 a year for 10 years. At the end of that period your investments would be worth £87,333 for each person, assuming retail price inflation (RPI) averages 2.75% over that period.

Investment: £7,500 a year each

Value after 10 years:£174,666

Something for the kids

All children born since September 1, 2002, qualify for a child trust fund (CTF). They each receive a voucher from the government which has to be invested in a CTF, and the child can access the money at 18.

Parents and grandparents can invest an additional £1,200 a year and returns are tax-free. After 10 years, you would have a fund worth £17,740 if it grew by 7% a year, assuming you make the maximum contribution.

Investment: £1,200 a year

Value after 10 years: £17,740

Add a bit of spice

Enterprise investment schemes (EISs) and venture capital trusts (VCTs), which invest in small and growing firms, also offer tax advantages. With an EIS, you get 20% income tax relief on investments of up to £400,000, and you can defer CGT on gains from other investments if you roll them into the scheme.

Capital gains from the EIS are also exempt from tax, and the money falls out of your estate for inheritance tax after two years.

However, EISs are high risk because they invest in unquoted companies and usually back just a handful of firms. This also makes them potentially difficult to quit in a hurry.

It is easier to sell your holdings in a VCT because they are listed companies, although to benefit from the tax breaks, you must invest for at least five years. VCTs give 30% income tax relief on up to £200,000 a year.

Any dividends from the VCT do not face higher-rate tax and profits are free of CGT. VCTs are still risky because firms can have no more than 50 staff and assets of £7m.

A couple who each invested £10,500 a year in a VCT could build up £310,456 after 10 years. They would also get £3,150 eacha year back in tax relief, so in effect they would have to invest just £7,320 each.

Investment: £7,320 a year each

Value after 10 years: £310,456

Don’t forget inheritance tax

While all the investments grow tax-free in your lifetime, your heirs will have to pay IHT at 40% above the allowance – £300,000 this year – when you die. So once you have £1m, spend it on a luxury retirement and give away anything left to your children. Everyone can make gifts of £3,000 a year and escape IHT. Unlimited gifts above that are tax-free if you live for another seven years.

Total investment: £28,620 a year each (with tax relief)

Total value: £1.01m

Where to invest for top returns

INVESTORS who want to build a £1m portfolio in a decade will need a manager who has delivered returns of at least 7% a year for 10 years, but only a handful of professionals have a track record that long.

We answer your questions.

Where should I invest my Isa allowance?

Invesco Perpetual Income, run by Neil Woodford, has delivered average annual returns of 15% over the past decade. The fund has risen 250% overall during that time.

Past performance is no guide to the future, but many advisers are still backing Woodford to deliver robust returns.

Rob Harley at Bestinvest, an adviser, also suggests Merrill Lynch Special Situations and Rensburg UK Select Growth for British exposure.

You will probably boost returns by looking outside the UK, particularly at emerging markets. Ben Yearsley at Hargreaves Lansdown, an adviser, likes Artemis European Growth, JP Morgan US, M&G Global Basics, First State Global Emerging Market Leaders and Melchior Asian Opportunities.

What about my pension?

Most members of company pension schemes tend to opt for the default fund option, which is usually a balanced fund investing in a mix of cash, bonds, shares and property.

If you are still in your thirties or forties, you can probably afford to take more risk, so check with the trustees if there are alternative options.

Personal pensions also tend to have default funds, but they have come a long way since the dark days of the 1980s and 1990s, when you were normally shunted into a with-profits fund. If you have been with your provider for a while, it is worth checking if it has expanded your options.

For new investors, advisers recommend Scottish Widows and Skandia because they have a good range of funds.

If you want to choose your own investments and have the pick of stars like Woodford, you can take out a self-invested personal pension (Sipp) from a provider such as Hargreaves Lansdown, AJ Bell or James Hay.

And VCTs?

Venture-capital trusts and enterprise investment schemes offer great tax breaks, but the failure rate can be high. Go for a manager with a good track record such as Aberdeen, Proven, Electra or Matrix.

Yearsley likes Aberdeen Growth Opportunities 2. The minimum investment is £5,000 and the offer period closes on Tuesday.