Prince Harry and Meghan will no longer be referred to as Royal Highnesses and will be "required to step back from royal duties".
It has also been revealed by the palace that the couple will also pay back the £2.4 million of taxpayers' money used to refurbish their Windsor home, Frogmore Cottage.
A statement released by Queen Elizabeth said the transition will take effect in the spring of 2020.
" "Following many months of conversations and more recent discussions, I am pleased that together we have found a constructive and supportive way forward for my grandson and his family. Harry, Meghan and Archie will always be much loved members of my family," her statement read.
" I recognise the challenges they have experienced as a result of intense scrutiny over the last two years and support their wish for a more independent life.
"I want to thank them for all their dedicated work across this country, the Commonwealth and beyond, and am particularly proud of how Meghan has so quickly become one of the family. It is my whole family's hope that today's agreement allows them to start building a happy and peaceful new life."
The couple had shocked the world when they announced they wanted to step back as "senior" members of the royal family.