I wrote some application under .Net 4.0 and I am looking a way to deploy it.
I am after some kit that will be able to:
Ideally this kit should be free and simple to use.
Definitely sounds like a job for WiX (Windows Installer XML Toolset).
Its a free open source MSI authoring toolkit that is xml based. It exposes 100% of the functionality of MSI and I've found it to be very useful in the past - it's definitely capable of doing everything that you have stated in your question.
Also as WiX is now widely used, there are plenty of resources available on the web: