Prince Harry and Meghan will no longer use their HRH titles and will not receive public funds for royal duties, Buckingham Palace has announced.
The couple will also no longer formally represent The Queen.
The Duke and Duchess of Sussex intend to repay £2.4m of taxpayer money for the refurbishment of Frogmore Cottage, which will remain their UK family home, the statement added.
The new arrangement comes into effect in spring this year, the palace said.
The statement comes after senior royals held talks on Monday about the future role for the couple, who this month announced they wanted to “step back” as senior royals.
The Queen said following “many months of conversations and more recent discussions” she was “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,” the statement continued.
“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.”
Buckingham Palace said the royal couple understood they were required to step back from royal duties, including official military appointments.
The palace added that they would continue to maintain their private patronages and associations.
“While they can no longer formally represent the Queen, the Sussexes have made clear that everything they do will continue to uphold the values of Her Majesty,” the statement added.
“The Sussexes will not use their HRH titles as they are no longer working members of the Royal Family.”
HRH, an abbreviation of His/Her Royal Highness, is used as part of the title of some members of the royal family, including prince or princess.
The palace said it would not comment on what security arrangements would be in place for the royal couple.
Their new website, sussexroyal.com, has been updated following the Queen’s statement.
“In line with the statement by Her Majesty The Queen, information on the roles and work of the Duke and Duchess of Sussex will be updated on this website in due course,” it said.
The announcement marks the conclusion of talks about the couple’s future with senior members of the family and royal aides.
Earlier this month, they said they wanted a “progressive new role” within the institution, where they would be financially independent and divide their time between the UK and North America.
Last year, they both spoke about the difficulties of royal life and media attention.
The duke said he feared his wife would fall victim to “the same powerful forces” that led to his mother’s death.
‘Harder to think of a much cleaner break’
They will always be, the Queen writes, ‘much loved members of my family’.
But that’s about it. No royal title, no royal duties, no military appointments, no tours, most of their time spent in Canada, no public money.
It is harder to think of a much cleaner break than this. Harry and Meghan are still members of the Royal Family, but they are effectively no longer royal.
The early talk was of a much more mixed life – one where perhaps Harry and Meghan continued with some royal duties, dividing their time equally between the UK and Canada.
But the contradictions and conflicts of interest were too many.
There are still lots of details to thrash out.
And the whole thing will be reviewed after a year.
But a new life awaits Harry and Meghan – celebrities, certainly, but a different kind of royalty.
BBC royal correspondent Nicholas Witchell said questions remain unanswered from the statement, including what the couple’s tax and immigration status will be in the UK and Canada.
Our correspondent said royal officials had not given a clear answer about whether Meghan still intended to gain British citizenship, which would entail her spending a certain amount of time in the UK.
He said that while they would divide their time between the UK and North America, it was expected that they will spend the majority of their time in North America.
Duncan Larcombe, former royal editor of the Sun and author of Prince Harry: The Inside Story, said a “scaled down Royal Family” had been “on the cards for some time”.
“He is not going to be able to turn off that global fame. He still has an important role to play within the institution, that’s probably why these discussions have dragged on a little bit longer than expected,” he said.
Royal expert Penny Junor said the new arrangement was “the best possible outcome and an outcome which will actually avoid catastrophe”.
She said: “They’re hanging onto their patronages which I think is absolutely terrific because they both care passionately about making the world a better place.”
However, she added: “The British public have lost out because these are two fantastic people who sprinkle fairy dust wherever they go and we are going to miss that, but clearly it was not making them happy.”
Meghan and Harry have already begun a transition phase of living in Canada and the UK.
The move was agreed by the Queen, Prince of Wales and Duke of Cambridge.
The duchess is in the Commonwealth country with son Archie, where the Sussexes spent six weeks over the festive period.
On Tuesday she visited a charity in Vancouver which campaigns for teenage girls living in poverty.
On Thursday, the Duke of Sussex hosted the Rugby League World Cup draw at Buckingham Palace – his first public event since he and the Duchess of Sussex said they would step back from royal life.